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) Implicit Taxation of Uzbekistans Cotton Sector: Estimation and Consequences

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.

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

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).

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

Cotton and Wheat sector Net Transfer Estimation calculated by World Bank and ADB (2003) Mln. USD WB calculationADB calculation Exported cotton Production target wheat Total amount of cotton Total amount of wheat Subsidies Taxes Net Transfers in % GDP 2,822,661,186,763,67 Net transfers: 2004 constant price US$ Total amount of cotton produced880,500 tons Export cotton456,200 tons Total amount of wheat produced5.436,800 tons Production target wheat2.502,000 tons

«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. 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. 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. Liberalization of cotton pricing and marketing. Introduction of real unified Land Tax or, Introduction of real unified Land Tax or, Export duty on cotton fiber. Export duty on cotton fiber.

Scenarios of tax burden on agrarian sector Liberalization of the prices and increase in the rate of land tax. 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. 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. Important condition remove state order, or keep only amount as intermediate step.

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. Conclusions

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