By Sandjar Djalalov, Swiss Cooperation Office in Uzbekistan

1. Implicit Taxation of Uzbekistan’s Cotton Sector: Estimation and Consequences 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)

2. 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.

4. System of pricing constructed on principle of «expenses plus» • The high implicit tax to agricultural production has been caused by the overestimated exchange rate • Local procurement prices made for cotton risen from 39% of the world prices in 2003, to 75% in 2001

5. 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).

6. The tendency of reduction of subsidies to agrarian sector from $840 million in 1996 up to 206 mln. USD was marked in 2002. • Since 2003 the share of subsidies for irrigation increased due to the higher cost of electricity. • Reduction of the subsidizing leads to growth implicit taxation, which strengthens by delay of payments

7. Total amount of cotton produced 880,500 tons Export cotton 456,200 tons Total amount of wheat produced 5.436,800 tons Production target wheat2.502,000 tons

9. «Laffeur Curve» and agrarian production of Uzbekistan • The basic postulate of Laffeur curve is that tax "press" up to some time leads to increase in tax revenues. • However reaching up to the critical point leads to the increase in burden and to reduction of receipts in the budget. • Liberalization of cotton pricing and marketing. • Introduction of real unified Land Tax or, • Export duty on cotton fiber.

10. Scenarios of tax burden on agrarian sector • Liberalization of the prices and increase in the rate of land tax. • Downturn of implicit taxation will increase productivity, which increases tax revenues in State treasury. • Important condition remove state order, or keep only amount as intermediate step.

11. Conclusions • 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.

12. Thank You!