Progress and Pitfalls of “Peace-Building”

in Afghanistan continues....

Since May 2003 agreement with the governors of border provinces,

the Government has increasingly gained control over customs posts. It has

rationalized the tariff regime by abolishing export duties, introducing a

uniform exchange rate, lowering the number of tariff categories, and

changing the base from value to turnover. New tax policy reform measures

were enacted in 2005, including a final wage withholding tax on higher

income employees, an improved income tax regime, and a limited range

of consumption taxes on services such as telecommunications, air travel,

hotels, and restaurants. A large taxpayer office has been established,

although there has been limited success on corporate income tax

collection. An amendment to the Revenue Law in 2005 removed the

generous regime of tax holidays and exemptions. Instead, it allows for

accelerated depreciation and loss-carry forward, which is designed to

encourage real investment rather than rewarding quick profits as do tax

holidays.

Since 2002, public finance management roles, rules, and information

have evolved, and significant steps have been undertaken with donor

support to implement emergency arrangements for public finance

management and build capacity in the key areas of budget implementation, treasury and external auditing. The extension of reform to the provinces, however, still faces severe capacity constraints. The

Government approved a Public Finance and Expenditure Management

(PFEM) Law in 2005. The law covers the Government sector, although

rules for centre-province relationships needs to be clarified under the new

regulations. The law will have to be further developed to regulate the

financial management of state-owned enterprises (SOEs). It provides

clearly defined PFEM roles and responsibilities, requires adequate

reporting, provides for independent review, and holds public officials

accountable.

To be continued......