Heat tariffs, closed benefits and pension reform - an analysis of fiscal proposals with Otabek Bakirov

**Heat tariffs, benefits and pension reform: Analysis of fiscal proposals with Otabek Bakirov**

Among the proposals that the Institute of Fiscal Analysis of the Ministry of Finance announced at the end of July and caused widespread discussion are the issues of heat tariffs, closed benefits and pension reform. Kun.uz spoke with economist Otabek Bakirov about these proposals.

**“Dialogue must continue”**

Otabek Bakirov noted that in previous years, changes in taxes and the budget were not discussed with the public. Every year at the end of December, after several hours of discussions in the lower house of parliament, information about these changes was made through the budget, which was approved. This situation constantly caused a lot of discussion and criticism. In this regard, Bakirov believes that the emergence of the current dialogue is gratifying. He noted that this dialogue must continue, because solutions and compromises on unpleasant and complex issues cannot be found without dialogue.

Secondly, of the many proposals made in the fiscal dialogue, only two or three caused widespread discussion. Mostly, issues that directly affected people's pockets, tax increases, or concerns were discussed. Most issues seemed to be left aside. According to Bakirov, the issue of heating tariffs did not cause much discussion because it was not a pressing issue in the heat of summer, and was perceived as an issue that should be discussed in the fall and winter.

**How fair is the cost of heating?**

Touching upon the issue of heating tariffs, Bakirov noted that this issue has been increasing every year for the past three years. Tashkent is the region that receives the most subsidies in terms of heating tariffs. It is said that after being transferred to Veolia management, residents' payments started at 15 percent of the cost, gradually increased to 16, then 17 percent. After last year's tariff increase, it was reported that the population's payments cover 18-20 percent of the cost. Bakirov calculated at the time that if the tariff is increased by 50-55 percent every year, it will be possible to reach the base tariff in about four years.

There is a very important point here: if the price they are saying is really fair. However, the fairness of the price in the services provided by energy, transport and other state monopolies is always under question. Starting in 2022, the cost of each kilowatt-hour and cubic meter of gas in energy is being talked about, and they are being increased every year. But no one answers the question of how fair this price is.

In the fiscal dialogue, proposals were put forward to increase the current tariffs by 5.5 times, introduce a social norm of up to 60 square meters, and provide services to the second and subsequent apartments at full commercial tariffs. According to Bakirov, before these proposals, it is necessary to ensure transparency of the cost issue and conduct independent studies. His questions are: how much is the cost itself? How much has the cost increased, what are the costs associated with management, administration, loans and purchased technical equipment? Bakirov noted that it is necessary to first answer the question of what the cost is, rather than relying only on the numbers of interested parties. This is also important for the confidence of the population.

The second issue is that it is wrong to postpone this issue every year. Centralized heat supply services are available in only a few cities in Uzbekistan. In other words, the whole of Uzbekistan pays taxes for the operation of the central heating system in the city of Tashkent and several small towns. That is, taxpayers from Andijan, Surkhandarya, and Khorezm who burn coal, and those who burn firewood, are given subsidies at the expense of their taxes for the convenience of living in Tashkent, Navoi, or Zarafshan. How fair is this?

The third issue is that subsidies for heat are increasing year by year. According to Bakirov, despite the fact that the share of total subsidies in the budget is being reduced, even subsidies for gas are being reduced, subsidies for heat are increasing year by year. This must be stopped somewhere.

If the state, claiming to provide subsidies, incurs expenses and continues to cover them, where will it end? Where will it stop? According to Bakirov, this question should be answered from an implementation perspective, if not today, then tomorrow.

Bakirov noted that he did not see a clear plan in the fiscal dialogue: "This is our plan, I did not see a proposal that this plan will be implemented with this step in 2027, with this step in 2028, 2029, 2030. That is, a general statement was made, that we will increase tariffs by five to five and a half times. How long will this be implemented? What steps will be taken? That is, we have not received answers to the questions of how this burden will suddenly affect the population, especially those with social pain."

**Where will the additional revenues to the budget be spent?**

Any changes related to taxes and the budget should begin with an answer to the question "what do we want to achieve in return for what?" Bakirov said that he did not want to criticize the Fiscal Institute, because they cannot give a complete proposal for the expenditure part of the budget, because there are other state bodies that are above it. If the Fiscal Institute wants to continue a sincere, understandable dialogue with the people, it will be necessary to clearly convey one thing: "We need this much additional budget revenue in 2027. Let's say, we need 10 trillion soums of additional budget revenue."

Okay, what will we spend these additional revenues on? Will we spend them on administrative expenses, that is, on management expenses, on officials, on economic expenses, on social expenses, that should be said in advance.

For example, we want to free up 2 trillion soums of subsidies from heating. We want to achieve, let's say, 1 trillion soums of additional revenue by imposing additional taxes, additional taxes on SMEs or the self-employed. We also want to get this much additional budget by introducing some other area, for example, a carbon tax. If we say that we want to spend the freed up revenues and additional income on these areas, then this will be a logical continuation of these actions.

In any country, in the countries of the free world, any tax changes are not only about the introduction of these taxes, but also about where and how the additional revenues from those taxes or the freed up funds will be distributed. Bakirov said that he had not seen any discussions or proposals on this distribution.

This is the reason why these proposals have not been received positively or enthusiastically. The taxpayer should be able to get an answer to the question "Why are we paying more for heating now, what do we get in return?" Without this side being guaranteed, making a proposal from this side does not create trust, does not build bridges.

If we look back since 2017, we have not created a material picture of what was received in exchange for each additional tax increase, additional tariff increase. This material picture must be made certain.

**“Privileges granted in a closed manner must be abolished”**

When it comes to increasing budget revenues, additional taxes or tariffs, we always say: “Stop, let's first determine for ourselves how effective the privileges granted so far have been, whether they are open or closed.”

Some privileges are still in effect. For example, a large number of closed privileges are still in effect. We do not know about many of them. If you look at the figures presented to the media, there is no classification of those privileges based on closed decisions or open decisions. There are classified benefits in the tax cut, such as value added tax, profit tax, etc., up to turnover. But how many of these benefits have we given in a closed form in terms of customs duties and taxes?

The Anti-Corruption Agency announces every year who received how many benefits. Even the Anti-Corruption Agency does not have access to information about the amount of benefits received by those who received those closed benefits.

While we are supposed to look at the issue of balance, we are seeing where it comes to the population, but there is no mention of the benefits of big business - those entities that have entered into those large state programs, entered into state orders, various contracts, various large investment projects. This is where the issue of sincerity arises.

Therefore, this part of the audit, the issue of reviewing and canceling previously granted, especially implicit, benefits, should also be on the agenda. If this is not on the agenda, it will be like treating a stepchild the same way as one's own child.

**"If the tax on individual entrepreneurs and the self-employed is equalized, companies that receive benefits will also have to pay social tax"**

Currently, individual entrepreneurs (IEPs) and the self-employed pay 1 percent of their turnover. The difference: IEPs have the opportunity to hire up to five employees and pay social tax in the amount of 1 BHM per month. For the self-employed, social tax is voluntary, and they can voluntarily pay 1 BHM of social tax per year if they want their seniority to be counted.

The Fiscal Institute is proposing to equalize social tax for sole proprietors and self-employed individuals starting in 2027. It is proposed to set a social tax of about 2 million soums per year for sole proprietors and self-employed individuals. In this proposal, social tax will be reduced for sole proprietors, and increased for self-employed individuals and will be mandatory.

Here is one question. If the tax burden of sole proprietors and self-employed individuals is equalized, will self-employment cease to exist? Because, unlike self-employed individuals, sole proprietors can employ up to five people. That is, the answer to the question of why they would pay more tax is here.

Secondly, sole proprietors can engage in retail trade. Self-employed individuals cannot engage in trade. Here we need to talk about the consequences, that is, we should not conclude that the 2.8 million self-employed people who exist today will all become taxpayers tomorrow. This would be a mathematical error. That is, the taxes of the 380 thousand or 400 thousand self-employed people who exist today may indeed decrease. But we should not go into the idea or model that all 2.8 million self-employed people will become social tax payers tomorrow.

If the difference between self-employed people and self-employed people disappears, a very large part of the self-employed will close or switch to self-employed people. What will they do if the tax burden is the same and there are no benefits?

The status of self-employed people was introduced during the pandemic to support the population with unstable income. Before that, we did not have this status. In recent years, it has also become the main instrument for employing the population. So, if these proposals are put into practice, it will be necessary to accept that the number of self-employed people will decrease sharply. Those who continue their activities, those who want to continue, will switch to the private sector.

The proposals on the social tax are correct. Everyone should bear the same burden. I do not want to unnecessarily drag this content back to the issue of privileges. We have companies that will be completely exempt from the social tax after 2020. With open decisions, with closed decisions. We have regions or sectors, we have industries that pay a 1 percent social tax. So, this minimum will need to be introduced there too. Because there will be another imbalance. If we want to ensure justice between private sector and self-employed people, we will have to apply this justice to other privileged groups and privileged companies. Otherwise, our sincerity will remain questionable. No one will believe these proposals.

Therefore, if the issue of social tax related to self-employed and SMEs is implemented as proposed, this minimum, that is, an amount of about 2 million soums per capita, per employed person, should also be used as a minimum for employees of companies with privileges. I do not see any other option.

**“The profit tax of banks and mobile communication companies should not be reduced”**

First, let me explain why the profit tax of commercial banks, markets and mobile communication companies was 20 percent. The New Tax Code was adopted in 2020. The issue of the profit tax being 15 percent for everyone, and 20 percent for banks, mobile communication and markets was related to the consensus at that time. That is, during our tax reform, there was also the issue of not reducing budget revenues. Banks, markets and mobile communication companies are entities with constantly high incomes. They are large taxpayers and they have a separate administration, tax control. Their income is constant, it is very easy to collect taxes from them. Therefore, one of the ways to not reduce budget revenues during that transition period was to leave a 20 percent rate for these three categories that pay constant taxes. (There was no clear answer to the question of why we are leaving their profit tax at a 20 percent rate, and reducing the rest to 15 percent. The above is my opinion).

The second issue, everyone discussed, was that banks would now have to pay value added tax for their services expressed in money, and in return, there was a lot of discussion about reducing profit tax from 20 percent to 15 percent. But when it comes to mobile companies, no one has even raised this issue. As I mentioned at the beginning of our conversation with you, there are many proposals, more than a dozen proposals, that are being passed without discussion. One of the proposals that is expected to pass this test, in my opinion, is to reduce the tax rate for mobile companies from 20 percent to 15 percent. I don’t understand the meaning of this.

Over the past three years, the excise tax for mobile companies has been reduced from 20 percent to zero. First from 20 to 15, then from 15 to 10 percent, and then it was canceled altogether. At the same time, mobile companies have not stopped raising tariffs. They have not improved their services. Now the question arises, wait, if the state has given you zero excise taxes, why are you raising tariffs?

According to the Ministry of Economy and Finance's own calculations, the abolition of excise taxes has reduced taxes collected from mobile companies by 1.2 trillion soums. That is, we abolished excise taxes on mobile companies and transferred 1.2 trillion soums to them. On the one hand, we want to collect some sums, "coins" from those who are self-employed, and on the other hand, we want to transfer trillions to mobile companies of our own free will.

Banks should also pay a 20 percent tax. If necessary, it should also be included in the VAT. If the issue is about scenarios between depriving the population of benefits and increasing their tariffs, then among the worst scenarios, the "better and worse" is to leave the profit tax of both banks and mobile companies at 20 percent.