Review of the Tax System in the Kyrgyz Republic

Tax revenues to GDP ratio in the Kyrgyz Republic is higher than most lower middle income countries at above 28 percent of GDP in 2022, but complex tax structure, narrow base and remaining weaknesses in tax administration pose risks to sustainability and create unequal tax burden across taxpayers. Revenue performance in 2021-23 improved significantly due to improvements in tax administration, but significant share of the improved tax collection is contributed by VAT on imports which is likely attributed to trade diversion after imposition of trade sanctions on Russia. The transit trade driven by the sanctions has increased substantially during 2022-2023 period. If the relative share of imports would have stayed at the actual 2021 level (64.5 percent), we estimate that the transit trade contributed to increase in VAT revenues of KGS 25.2 billion (equivalent of 2.6 percent of GDP) in 2022, and an estimated KGS 37.9 billion in additional VAT revenues (3.3 percent of estimated GDP) in 2023. These one-off exceptional revenues should be isolated and treated separately when making medium-to-longer run tax revenue forecasts and when considering tax policies. This report looks into three major issues, tax gap and how it could be reasonably reduced over the medium term; needed tax policy changes; and how administration provisions in tax legislation can support the same level of tax revenues, with more equitable distribution of tax burden promoting growth and lowering compliance costs. The report touches briefly on tax administration key issues, as ongoing tax administration reform agenda supported by the World Bank funded project is currently underway.