By Sandjar Djalalov,Swiss Cooperation Office in Uzbekistan

Prepared for the Asian Development Bank and the Ministry of Economy of the Republic of Uzbekistan (TAR UZB 37148)

Implicit Taxation of Uzbekistan’s Cotton Sector: Estimation

and Consequences

State orders and quotas:• State order regulates by amount produced and area sown;• Cotton – 100 % purchased by government;• Wheat – 50 % purchased by government, 50 % for own consumption and marketing.

State regulations of prices:• Price for inputs such as fertilizer and pesticides above market prices;• Price disparity between production means and agricultural products.

Diag. Amount of Wheat need to purchase1 ton fuel or fertilizer

1,1

2,4

4,8

3,1

2,6

1,6

4,1

3,43

1,6 1,7 1,81,9

3,5

1

2,82,5

2,3

0

1

2

3

4

5

6

1990 1991 1996 1997 1998 1999 2000 2001 2002

whe

at (

ton)

Fuel (ton)

Fertilizer(ton)

Diag. Uzbek Cotton fibre Domestic and World Market prices

0

500

1000

1500

2000

2500

US d

ollar

s pe

r ton

Cotton f iberWorld price

Cotton f iberDomesticprice

System of pricing System of pricing constructed on principle constructed on principle of «expenses plus» of «expenses plus»

The high implicit tax to The high implicit tax to agricultural production agricultural production has been caused by the has been caused by the overestimated overestimated exchange rateexchange rate

Local procurement Local procurement prices made for cotton prices made for cotton risen from 39% of the risen from 39% of the world prices in 2003, to world prices in 2003, to 75% in 200175% in 2001

Subsidies for agriculture (2004)

• Subsidies for maintenance of agricultural machinery

($30 million);

• Subsidies for fuel and lubricants ($31 million);

• Subsidies on irrigation ($261 million. $69 million of

this is subsidies for electricity);

• Subsidies for fertilizers ($22 million).

412

428

283

68

299

54

231

43

191

61

169

94

159

42

194

42

261

82

0

100

200

300

400

500

600

700

800

900

Mln

. US

D

1996 1997 1998 1999 2000 2001 2002 2003 2004

Subsidies to Uzbekistan Agriculture

Subsidies on irrigation Input Subsidies

The tendency of The tendency of reduction of subsidies reduction of subsidies to agrarian sector from to agrarian sector from $840 million in 1996 up $840 million in 1996 up to 206 mln. USD was to 206 mln. USD was marked in 2002. marked in 2002.

Since 2003 the share of Since 2003 the share of subsidies for irrigation subsidies for irrigation increased due to the increased due to the higher cost of higher cost of electricity. electricity.

Reduction of the Reduction of the subsidizing leads to subsidizing leads to growth implicit taxation, growth implicit taxation, which strengthens by which strengthens by delay of payments delay of payments

Cotton and Wheat sector Net Transfer Estimation calculated by World Bank and ADB (2003)

Mln. USD  

  WB calculation ADB calculation

  Exported cottonProduction

target wheatTotal amount

of cotton Total amount

of wheat

Subsidies 292 034 304 917 186 091 304 917 186 091

Taxes 569 277 566 791 286 571 969 558 546 471

Net Transfers 277 243 261 874 100 479 664 641 360 379

in % GDP 2,82 2,66 1,18 6,76 3,67

Net transfers: 2004 constant price US$

344 325 143 825 448

Total amount of cotton produced 880,500 tons Export cotton 456,200 tonsTotal amount of wheat produced 5.436,800 tonsProduction target wheat 2.502,000 tons

Indirect Taxation of Cotton and Wheat Production

-1070 -1136 -1177-1467

-1161-837

-1144

-1631-1323

840

505623

251

623 629

206 207 282

-198

432 357

1216

117

-242

902

1424

1041

-2000

-1500

-1000

-500

0

500

1000

1500

2000

1996 1997 1998 1999 2000 2001 2002 2003 2004

Mln

. US

D

transfers from agriculture transfers to agriculture

Net transfers from agriculture Net transfer and Debt right-off

«Laffeur Curve» and agrarian production of Uzbekistan

Land tax (US$10)

Diag. State tax from 1 ha (2003)

Е

С

Processing and marketing losses (US$100)

Tax sum per hа

Tax burden %

100

Production cost (US$202)

US$470 (Acting tax)

50

0

Farm income (S$790)

Indirect tax (US$470), excluding subsidies

75

25

B

A

Profit (US$8)

D

The basic postulate of The basic postulate of Laffeur curve is that Laffeur curve is that tax "press" up to some tax "press" up to some time leads to increase time leads to increase in tax revenues.in tax revenues.

However reaching up However reaching up to the critical point to the critical point leads to the increase leads to the increase in burden and to in burden and to reduction of receipts in reduction of receipts in the budget. the budget.

Liberalization of cotton Liberalization of cotton pricing and marketing.pricing and marketing.

Introduction of real Introduction of real unified Land Tax or,unified Land Tax or,

Export duty on cotton Export duty on cotton fiber. fiber.

Scenarios of tax burden on agrarian sector

Land tax (US$350)

Diag. State tax per 1 ha after tax reform

Е2

Losses in processing and sale(US$50)

Tax sum per ha

Tax burden US$

2000

Production cost (US$450)

US$750

730

0

Farm income with yield 6 t/ha (US$ 2200)

500

1000

E

E1

1350

С

С1

US$470 US$600

Farm income with yield 4 t/ha (US$ 1350)

С2

Liberalization of the Liberalization of the prices and increase in prices and increase in the rate of land tax.the rate of land tax.

Downturn of implicit Downturn of implicit taxation will increase taxation will increase productivity, which productivity, which increases tax increases tax revenues in State revenues in State treasury.treasury.

Important condition Important condition remove state order, remove state order, or keep only amount or keep only amount as intermediate step.as intermediate step.

Benefits from removing indirect taxation of cotton and wheat production and the introduction of price liberalization: • Introduction of the land tax will make practice of the state order of cotton and wheat unnecessary. It is supposed, that tax revenues will increase; the state receive necessary profit;• Second, necessity of mobilization for the control of performance of the state orders over cotton and wheat production will disappear, and necessity of intervention for affairs of farmers will be reduced;• Third, from economic point of view, the land tax or export duties is ideal as it does not distort the price and, hence, keeps the proved price signals for economy that is very important for optimum distribution of resources.

Conclusions

Thank You!