Uzbekistan: Tashkent’s Flat Tax Crushing Small Businesses

A woman sells tyubeteykas – skullcaps – in the Eski Bozor (Old Bazaar) part of the main market of Urgut, a small Uzbek town not far from the Tajik border. Despite Uzbekistan’s series of programs to support small and medium businesses, authorities recently demolished several large markets as part of a major Tashkent redevelopment project. (Photo: Joanna Lillis)

In early 2011, when Uzbekistan’s authorities pledged to implement programs and policies to support small and medium businesses, Naimjan Akhmedov operated a travel agency with two employees in Tashkent. This month, after the initiatives went into effect, Akhmedov, found himself faced with a much higher tax bill and wrestling with numerous bureaucratic hassles. So, he decided to close up shop.

Officials touted the initiatives in recent months as a way to stimulate entrepreneurial activity. The Cabinet of Ministers even designated 2011 as the "Year of Small Business and Entrepreneurship.” Reforms included a flat monthly tax fee, called the Unified Tax Payment, for all businesses with less than 100 workers. In June, authorities also simplified business registration procedures and granted small business owners -- no longer just large, state-owned companies -- the right to bid for government contracts.

State-controlled media outlets proceeded to trumpet the virtues of the new measures. Yet talk to entrepreneurs, and they are quick to cite a host of new difficulties in doing business. Many confirm that authorities did simplify registration procedures, but at the same time they say businesses are still subject to random inspections by up to 12 different government agencies. And many, if not most, inspectors are looking for kickbacks, entrepreneurs told EurasiaNet.org.

The biggest headache for small business owners is the new business tax. It was purportedly designed to make entrepreneurs’ lives easier by combining several levies, including property and income taxes, into one. The flat tax, however, has ended up favoring larger enterprises at the expense of mom-and-pop types of businesses. In a review of the impact of the new system, the news website Uznews.net estimated that a small business with $400 in monthly revenue would end up with a monthly tax bill of about $160.

“Many small businesses will close down, and thousands of people will lose the source of their livelihood” because of the flat tax, the Uznews commentary stated. Small- and medium-sized enterprises (SMEs) account for approximately 52 percent of Uzbekistan’s GDP and employ about three-quarters the country’s labor force, according to recent government statistics. (By comparison, in 2005, SME’s were responsible for 38 percent of GDP).

Other new measures also hurt traders. Prices of consumer goods, for example, swelled after the government introduced new excise taxes in April that were designed to protect local industries. Those duties range from 50 percent to 200 percent on imported goods.

Uzbek authorities had hoped the reforms would put their relationship with the country’s entrepreneurial class on a sounder footing. The past year, after all, had been a rough one for businesses, both big and small. Uzbek authorities closed down scores of large corporations in 2010 -- including Zeromax, a massive Swiss-registered conglomerate -- and arrested more than 40 wealthy Uzbek executives in what officials called an anti-corruption sweep. Earlier this year, authorities demolished several large markets, causing havoc for more than 10,000 small-time traders.

Tashkent also took aim at foreign entrepreneurs in 2010, closing down 50 Turkish companies operating in Uzbekistan, including the Turkuaz shopping center in the capital. In some instances, officials justified their actions by claiming that Turkish businessmen were members of banned religious movements. In addition, authorities froze assets of Oxus Gold, a British gold mining company that had been affiliated with Zeromax. Oxus Gold representatives claim that Tashkent wants to nationalize the lucrative company.

Bokhodir Choriev -- a former entrepreneur and the leader of the Birdamlik opposition movement, who now lives in the United States – said government reforms did nothing to address major stumbling blocks for businesses, namely widespread corruption and a poorly developed banking sector. Uzbekistan consistently ranks near the bottom of Transparency International’s annual Corruption Perceptions Index. In addition, the government still does not let the Uzbek currency, the sum, float freely on currency markets, something that enables the black market to thrive.

The hardships faced by entrepreneurs are compounded by a legal system that is under the thumb of the political leadership, Sanjar Umarov, an Uzbek businessman who now resides in the United States after spending several years in an Uzbek prison on embezzlement charges, told EurasiaNet.org.

“The system has been designed to provide any high governmental official or petty local official with the ability to simply take away anyone's property, whether it is a farm or a business, through the abuse of our terrible tax and legal codes,” said Umarov, who also runs the opposition Sunshine Coalition.

Some bold entrepreneurs have dared to resist the new measures and have organized pickets in front of government buildings in recent months. Police quickly dispersed these protests, according to witnesses. The majority of entrepreneurs are unwilling to protest the new rules fearing government retribution. Instead, many rely on alternative means to avoid government regulation, a tax collector in Tashkent told EurasiaNet.org. Entrepreneurs sometimes pay half of the tax amount, under the counter, to corrupt tax collectors, he confirmed. In return, tax collectors provide the traders with protection.