By Katharine Houreld
KABUL, March 31 | Sat Mar 30, 2013 9:59pm EDT
KABUL, March 31 (Reuters) - One of Afghanistan's most surprising success stories lies tucked away on a potholed street notorious for suicide bombings and lined with rusting construction equipment.
The work of the country's top tax collector is more inspiring than the view from his office in Kabul. Taxes and customs raised $1.64 billion last financial year, a 14-fold increase on 10 years ago. That means, now, the government can pay just over half of its recurrent costs such as salaries.
Thanks to tougher enforcement procedures, Afghanistan's tax to GDP ratio today stands above 11 percent - ahead of neighbouring Pakistan's dismal 9 percent.
Increasing revenues is vital as donors begin reducing aid ahead of the 2014 drawdown of NATO troops, who have provided the backbone for security since U.S. forces invaded after the Sept. 11 attacks on the United States.
By the end of this year the United States alone will have spent $100 billion on Afghan reconstruction. But future pledges are a fraction of that.
"We are largely dependent on international aid. We would like to be independent," said Abdurrahman Mujahid, the new head of the revenue department. "I would like a sustainable Afghanistan for all the children."
Despite rising revenues, the government will rely heavily on donors for years to come. Taxes, customs and mining revenue will only meet $2.5 billion out of a $7 billion budget this year.
Most of the revenue comes from large corporate taxpayers, who complain their payments have not improved power cuts, potholed roads or security.
Corporations pay a flat tax of 20 percent - the same rate for an individual earning over $2,000 a month.
But unlike developed countries where personal income tax generates a sizeable chunk of revenue, most Afghans scoff at the idea of giving the government some of their meagre earnings.
The average annual income, in a country ranked one of the world's poorest, is just $470, according to the World Bank. Those making less than $100 a month don't have to pay tax.
"It's not a good government," said moneychanger Abdurrahman Arif, 28, as he held a wad of soiled notes and scanned for customers. "I don't pay tax. The rich people don't and the government should go to them before they come to me."
Afghanistan has a similar problem to neighbouring Pakistan - the very wealthy don't pay their share, and weak institutions often have little way of forcing them.
Authorities admit that taxing the rich isn't easy in a country where the powerful often command militias. But Mujahid promises tax evaders will "be introduced to the law enforcement agencies".
SUBSTANTIAL ACHIEVEMENT
Much of Afghanistan's money is in an undocumented black economy. Corruption is endemic and the country produces 90 percent of the world's opium. Billions of dollars in cash leave the country every year in suitcases.
The security situation is discouraging. Taliban and other militias have made gains in many areas as foreign combat forces wind down their missions.
But some Afghans still manage to make money. Many businesses are fuelled by the aid dollars that have poured into the country over the last decade. Luxury supermarkets, travel agencies and stationary shops crowd the capital's streets.
A U.S. embassy official in Kabul commended Afghanistan's ability to raise tax revenues.
"It's a pretty substantial achievement," the official said, but noted the nation still faced a large funding gap, partly because of its huge security bill.
"It's going to continue being a problem until they can get revenues from the extractive industry, and that's going to take some time," the official said, referring to Afghanistan's rich but undeveloped mineral deposits.
Donors currently pay for just under half Afghanistan's operating costs - mostly government salaries - and more than three-quarters of all development projects like roads, dams and electricity equipment.
Rampant corruption means this money is often stolen, angering donors, fuelling anti-government rage and keeping aid from some of the world's neediest families.
Donors hope that if Afghans foot more of the bill for public services they may become less tolerant of graft from their leaders.
PUGNACIOUS PREDECESSOR
Mujahid, the new head of the revenue department, has large shoes to fill. His predecessor Ahmad Shah Zamanzai oversaw much of the department's growth and didn't shrink from confrontation.
When a vice-president refused to pay tax on income from renting out houses he owned, Zamanzai threatened to leak it to the press. Elections were approaching. The vice president paid up.
Under Zamanzai, the tax department jailed more than 20 tax evaders, froze bank accounts, slapped on travel bans and shuttered the premises of businesses that refused to pay.
In one showdown, he took on the glitzy wedding halls that have mushroomed up in the capital. When the 60 or so venues refused to pay their dues, he had police padlock a dozen of the biggest until the rest fell into line.
Zamanzai was appointed head of the state-run Pashtany Bank as part of a bureaucratic reshuffle this month. His first task, he said, would be to use skills honed in the tax department to extract overdue loan repayments from powerful Afghans.
But the tough tax enforcement has angered some businessmen.
Najib Ullah Latify's spotless factory, full of humming machinery and rows of workers in blue overalls and yellow hard hats, stands a few minutes drive from the tax office. High Standard Pipe employs 850 people and supplies pipes for projects providing clean water all over Afghanistan.
Latify said he'd expand but harassment from the tax man was hurting his business.
In recent years, he says, he's been repeatedly overcharged by the tax office and promised refunds have not been credited. Officials frequently offer to slash his tax bill in return for bribes, he added. When he refuses, he says, officials disrupt his imports and suspend his license.
"I don't know what to do, I have shouted everywhere that they are ruining my business," he said.
"I don't mind paying taxes. Even if 60 percent of it is spent on drinking and shopping and trips for (politicians') wives, maybe 40 percent will go to schools or hospitals. But they must tax me correctly."
The new tax chief, Mujahid, was not familiar with Vitaly's case, but promised to investigate. More than 10 tax collectors - whose basic salaries start at $180 a month - have been fired for corruption in the last two years.
"Corruption is a part of public life in Afghanistan," said Mujahid. "We have the aim to make this department corruption-free."
This year he's planning to finish computerizing tax records, usher through a law on Value Added Tax, and strengthen collection in the provinces - more than 90 percent of government taxes currently come from the capital.
"There's a lot of achievements, but for sure we have problems, and the biggest problem is corruption," he said. (Editing by Jeremy Laurence)
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