High social tax hinders business development in Kyrgyzstan

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BISHKEK (TCA) — There is only one social-tax payer per every two pensioners in Kyrgyzstan, whereas according to the International Labor Organization standards one pensioner shall have at least three working-age social-tax payers.

There are more than 1.4 million social-tax payers in the country. Farmers are exempt from the social tax. There are 604 thousand pensioners in Kyrgyzstan.

Challenges and prospects of the social security were discussed at a roundtable held in Bishkek by the National Business Club on November 18.

High social tax

Many factors affect the collection of the social security tax in Kyrgyzstan. The rate of the Social Fund tax amounts to 17%, which is more than the income tax (10%). Because of this, entrepreneurs do not show the full payroll. For example, in Kazakhstan, the social tax (11%) is almost twice as less than the income tax (20%).

Moreover, reporting on the social tax is complicated, and monthly reporting burdens businesses. For comparison, SMEs submit tax reports quarterly, the Association of Suppliers and Distributors of Kyrgyzstan said.

The social insurance policy is obtained and paid separately from the patent, and this is time-consuming for entrepreneurs. The patent can be obtained for any period of time, while the insurance policy for 30 days only. Over the past year, the insurance policy cost has risen six-fold while revenues of businesses have dropped significantly.

Unfair competition

Many employers pay wages to employees “in envelopes” in order not to pay the social-security tax. As a result, there is a significant difference between the number of issued patents and social-insurance policies, with the patents sold many times more than the insurance policies, although their numbers should be the same.

The shadow economy creates unfair competition for honest entrepreneurs, distorts statistics, and leads to inefficiencies of the government’s economic policy.

Labor migration

A large part of Kyrgyzstan’s working-age population works abroad and do not pay the social tax.

Every third Kyrgyzstan citizen is in labor migration abroad, Prime Minister Sooronbai Jeenbekov said. Over 95% of labor migrants work in the Eurasian Economic Union member countries. According to official data, more than 540 thousand Kyrgyz citizens work in Russia, 113 thousand in Kazakhstan, 15 thousand in South Korea, 14 thousand in Turkey, and 30 thousand in other non-CIS countries.

Business advice

Entrepreneurs propose revising the social security system. Both employers and employees do not understand why they should pay to the Social Fund. Many people want to know exactly the size of their future pension, if they now pay to the Social Fund.

According to the Social Fund, only the organized sector pays fixed social security contributions for pension throughout the world, while people engaged in the informal sector (whose income is not regular) make contributions at their own discretion, but the state subsidizes this sector.

Business people suggest the following scheme of social contributions payment: the more jobs employers create, the less they pay to the Social Fund. It is now unprofitable for employers to create new jobs because of the high social tax rate.

The Social Fund agrees that the current pension system is unfair and does not encourage entrepreneurs to pay the social tax. Honest payers, mainly large companies and state-run organizations, now bear the entire burden of the pension system.