1.1. The composition and structure of the former USSR's state budget revenues were determined by socialist principles of the social order and functions of the soviet state.
1.2. The forms of socialist property in the USSR were state property and collective-farm cooperative property. Incomes from economic content of this property were divided into:
1.3. Various forms of ownership determined two sources of state revenues in the budget: 'untaxed method' (payments from state enterprises and organisations) and 'tax method' (payments from cooperative enterprises, public organisations and receipts from the population).
1.4. The basic source of state budget income was the accumulation of the socialist enterprises and organisations. It is visible from the following data:
| 1980-1990 | % |
| Total Revenues | 100 |
| Receipts from the socialist economy | 91.6 |
| among them: | |
| Turnover Tax | 33.1 |
| Payments from profit | 31.4 |
1.5. Turnover tax and payments from profit formed the basic and decisive part of the USSR state budget income. A significant proportion of payments from profit came from a payment for basic funds and standardised circulating assets, fixed (rent) payments, deduction from profit, with freedom to retain the remainder of profit. Budget receipts also included taxes from the incomes gained from screening films, income tax from the profit of cooperative enterprises and public organisations and income tax from collective farms and wood income.
1.6. State expenditures consisted of state enterprises' charges which were imposed locally and charges of the state budget which were financed by the centralised fund.
1.7. The composition, volume, direction and structure of the state budget charges on the development of the national economy were determined during budget planning, in turn based on the parameters of the state plan for the country's economic and social development.
1.8. The charges of a national economy financed by the state budget were planned on territorial and sectoral bases and had a definite orientation (capital construction, operational charges, increment of the standard of own circulating assets).
1.9. Having gained independence in 1991, the Government of the Kyrghyz Republic began working out a comprehensive program of economic reform. This program aims to maintain the transition from an economy with centralised planning and administrative control over distribution of the resources to one where the decisions in the economic sphere are determined first of all by market forces.
1.10. As a consequence of the disintegration of the USSR, the budget allocations from the centre which were the basic source of receipt to the local budget have stopped. Traditional trade connections were broken, causing loss of the markets for the Republican specialised industrial enterprises and difficulties in obtaining imported resources. At the same time relative prices, in particular on energy used in trade with the partners of the former USSR, were reconsidered, resulting in a sharp deterioration of the trade conditions for the Kyrghyz Republic.
1.11. Instability of the credit policy of the rouble zone of the Russian Federation and other financial-economic factors prompted the Government of the Republic to introduce a national currency. That allowed the Government to take, on the one hand, complete responsibility for stabilising financial policy and, on the other hand, to carry out restrictive credit, fiscal and income policies and to strengthen these steps by making structural reforms, including reducing the quantities of state orders and purchases. The privatisation programs were completed and price reform was carried out.
1.12. Up to 1992 the Government of the Kyrghyz Republic depended on the centre for receipts from governmental charges. The centralised deductions to the consolidated budget of the state administration sector in 1991 represented 35.5% of general income. Tax receipts represented 49% of total revenue and subsidies. The largest tax source was the tax from the turnover levied by the Republic, which represented 21.6% of state revenues and subsidies.
1.13. In 1992 the termination of budget deductions from the Union caused a heavy financial shock for Kyrgyzstan.
1.14. The Parliament cancelled taxes on turnover and realisation and introduced taxes on added cost and excise. As for incomes, the Government has faced reduced tax receipts as a result of declining business activity. Total incomes represented 12.7% of Gross National Product. Attempts were made to control the budget partially by further reducing charges.
1.15. As a consequence of these factors a significant budget deficit was forecast (more than 13% GNP), which was financed by the National Bank's credits and foreign grants and credits.
2.1. In the beginning of 1993 the Government's economic stabilisation efforts were complicated by the deterioration of interstate trade and the system of payments. Delays and irregular payments from foreign financing sources strained trade relations with neighbouring states (coinciding with introduction of the national currency) and contributed to a further deterioration of manufacturing.
2.2. By the end of the year, as a result of large increases in payments for dwellings and public utilities, inflation grew to 30% per month. On the whole, wage policy had a restrictive character, and despite corrections the wage level has decreased since 1993.
2.3. The fall in demand for Kyrghyz exports by the states of the former Soviet Union, sharp increase in the prices of imported resources, in particular fuel resources, intensified the financial difficulties of enterprises. As a result their huge overdue debts have increased even more. Transfers and allocations of the credits for the liquidation of these debts were the main reason for the increase in the large budget deficit at the beginning of 1993.
2.4. Despite the governmental privatisation program being carried out according to the plan, reorganisation of the enterprises and improved management of governmental enterprises had limited success; private property on land was not permitted, and there was a lack of publicity during the privatisation process.
2.5. The scope of the consolidated budget of the state management sector includes the budget of the Republic, six districts and Bishkek.
2.6. The financial structure is strictly centralised and the Republican bodies have an opportunity to heavily influence the policy of the authorities regarding incomes and charges. Non budget funds and state enterprises have greater financial independence.
2.7. Nowadays with the Kyrghyz Republic system of fiscal federalism developed, the roles of Republican and local bodies of management are determined in a new way. Republican bodies of management bear the main responsibility for receiving incomes and provide a large part of local management bodies' assets through the system of distributing incomes.
2.8. Both levels of management share their receipts from the collection of three basic taxes in proportions determined by Republican bodies of management. The taxes are: tax on added cost, excises and income tax from enterprises.
2.9. The Republican and local bodies of management share the responsibility for state financing. Republican bodies are responsible for maintaining national defence and bear a large part of charges on the social welfare system. Local bodies bear the basic responsibility for maintaining education and public health services. Bodies of management of both levels are responsible for approving the subsidies to the budget enterprises and departments.
2.10. The Ministry of Finance bears responsibility for drawing up the Republican budget. Local bodies of management form their budgets under the control of the Ministry of Finance. As a whole, the preparation of the budget is supervised by the government and is affirmed by the Parliament of the Republic.
2.11. The budget year coincides with the calendar year. According to existing budget legislation, budget ministries submit their budgets for consideration by the Ministry of Finance three to four months before the beginning of the relevant financial year. Authorities also submit their budgets. Forecasts of profitable articles of the budget are made by Tax Policy Administration of the Ministry of Finance, the State Tax Inspection and the Customs Service. Projections of the Republican budget and a report on budget performance for the previous year are directed to the government, and then to the Parliament for the final statement.
3.1. A Tax Code was introduced for the Kyrghyz Republic as of 1 July 1996. It is a statute-book on all taxes, their administration and actions of taxpayers. The Tax Code covers all taxes except customs duties, taxes and payments adjusted by the customs legislation, local taxes and taxes used by local authorities within the limits of rights given by the Jogorku Kenesh (Supreme Council).
3.2. In our opinion, the Tax Code of the Kyrghyz Republic meets the requirements of the international standard. It includes five basic taxes and their administration. The basic taxes are income tax, tax on added cost, tax on the profit of juridical persons, excise tax and land tax.
3.3. Administration of taxes in the Tax Code is carried out in accordance with the international standards and provides numerous measures to increase efficiency and streamline the registration of all taxpayers. The procedures to collect the financial and penal sanctions are stipulated in the Code.
3.4. The basic principle regarding the management and control of taxes set out in the Tax Code is the maintenance of a Tax Service. The Tax Service is a unique body to manage taxes and control the fulfilment of tax laws to maintain the efficiency of tax collection.
3.5. According to the Tax Code, businessmen - physical persons for the purposes of determining the taxable income (as well as juridical persons) - have a right to exclude industrial charges from their income. The rates of income tax have been reduced since 1 June 1996.
3.6. A uniform rate of profit tax of 30% was introduced to all kinds of activity. That replaced the previous arrangements which provided for rates from 15% to 50% depending on the kind of activity.
3.7. The tax on added cost is the basic indirect tax. According to the Tax Code it is payable according to the destination point of the goods and services. That is, the tax on goods and services is levied when crossing the customs border. For states participating in the CIS, the country of origin continues to be used as the basis of taxation. Deliveries and imports face tax on added cost at the rate of 20%.
3.8. Goods made in the Republic or imported to the Republic face excise tax at rates affirmed by Jogorku Kenesh of the Kyrghyz Republic.
3.9. The land tax is a type of obligatory payment for using a plot. The rates and order of payment are developed by the Government of the Republic and are affirmed by Jogorku Kenesh of the Kyrghyz Republic.
3.10. Acceptance of the Tax Code has caused the cancellation of a number of taxes. These are:
3.11. The Tax Code specifies a number of rules to assist taxpayers which were not included in the previous legislation. Among these rules are:
4.1. The law on the Republican budget for 1997 was accepted in the middle of December 1996. This is the first budget since Kyrgyzstan gained economic sovereignty. Discussion on the budget was finished and the budget accepted before the new financial year.
4.2. Such easy acceptance of the 1997 budget is due to two reasons. First, in Kyrgyzstan the law on the budget is traditionally observed as a scheduled task in which the required changes are made during implementation. The second reason is connected with general planned developments in the Republic's economy. Really the economic parameters of 1996 appeared much better than those of 1995, notably the marked growth of the GNP, growth in specific areas of industrial manufacturing and agriculture and reduced budget deficit ratio.
4.3. The new budget provides for low inflation (15% annually), small growth in GNP (7%), small growth in social payments (but rather appreciable given the overall budget) and a reduced budget deficit (up to 5.7% of GNP).
4.4. The 1997 budget aims to strengthen the centralisation of state resources. There were great changes in financial relations between central and local bodies. Recently the whole Republic was divided into so-called 'poor' and 'rich' regions, which had weak and strong local budgets, respectively. The 'poor' regions had as their basic income sources a 100 percent transfer of the taxes in the local budget plus subventions from the Republican budget. Subventions were given to offset a common lack of assets. In this system increases of the incomes of these regions reduced the sums of subventions (and reduced incomes meant increased subventions). Accordingly, local administrations directed all their efforts not to increasing their incomes but to proving that they had low incomes and needed subventions.
4.5. Deductions from the nation-wide taxes were the basic income sources of the local budgets of 'rich' regions (the Bishkek and Chui district). However, low rates of distribution of the nation-wide taxes reduced the stimulus to increase tax receipts. The rates of distribution are reviewed annually and vary according to the kind of tax. As a result local state administrations sought first to increase of the rates of distribution.
4.6. In order to overcome the conflict of interests between the centre and regions, it was agreed first to establish a single, stable rate to allocate tax for all regions and to cancel unnecessary subventions.
4.7. The law on the state budget of the Kyrghyz Republic for 1997 specifies that an objective is 'to establish this year for the local budgets of districts and Bishkek, standards of deductions from scheduled receipts of the tax on profit of enterprises, associations and organisations of all forms of ownership, excise tax, income tax from the population at a rate of 35%' (item 10). It also states 'if the quota of tax receipts planned for 1997 and specified in item 10 of the law and tax on added cost are exceeded, 75% will be allocated to the local budgets' (item 11).
4.8. Thus, tax on profit, excises and income tax are allocated as: 35% to the local budget and 65% to the Republican budget. Tax on added cost is allocated completely to the Republican budget and, if the projected tax collections are exceeded, 75% of the amount of the excess of all kinds of taxes also goes to the local budget. It is the view of the people who developed the budget that this would mean that tax incomes will not depend on transfers from the Republican budget and that it will stimulate increased tax collection. However it is expected that the regions with higher incomes will receive more tax receipts and the scheme will only rather weakly stimulate the economic development of the regions.
4.9. The law gives a special priority to the tax on added cost which will be completely centralised in the Republican budget. Generally speaking, the Ministry of Finance considers tax on added cost the main constituent of the profitable part of the Republican budget, accounting for 50% of all tax receipts.
4.10. The new taxes are stipulated in the law on the budget for 1997. Item 19 reads that for the whole Kyrghyz Republic from 1 January 1997 payments include 'obligatory medical insurance payments of employers at the rate of 2% from the fund of labour (income) payment'. Employers' insurance payments to the employment fund are kept at the rate of 1.5% from the labour fund (income) payment, payments on state social insurance at the rate of 33% from the labour fund, and 2.5% of wages are directed to the social fund (items 17 and 18).
4.11. The formation of a profitable part of the budget this year is rather complex. The structure of tax receipts shows that the tax on added cost is the main load for enterprises of the Republic. Tax on added cost amounts to 37% of all budget incomes, including untaxed receipts, incomes from operations with capital and official transfers. In comparison, in 1995 tax on added cost represented 27% of all budget incomes and represented 29% of all budget incomes in the first ten months of 1996.
4.12. Income from surtax, excise taxes and taxes on foreign trade activities are kept at the level of the last year - accordingly about 6%, 7% and 9%, respectively. This demonstrates a strengthening of indirect taxation, even without any increases in the economic activity of the enterprises. The importance of the tax on profit has fallen considerably, falling from 16% of budget income in 1995 to an estimated 6.6% in 1997. These basic taxes should ensure a profitable part of the budget which in turn should be sufficient for the account articles of the budget.
5.1. Since 1992 book-keeping of incomes has been reformatted. Kyrghyz Republic Government decision No.595 of 30/11/92 authorised the transition of the Kyrgyzstan system of book-keeping. This system is accepted in international practice as required in market economies.
5.2. The Ministry of Finance of the Kyrghyz Republic is a leading state department in implementing and co-ordinating innovations and introducing standards of book-keeping, developed according to the international standards.
5.3. In addition, the 'Regulation on book-keeping and accountability in the Kyrghyz Republic' was put into action by order of the Ministry of Economy and Finance of the Kyrghyz Republic No. 27 of 11/09/92. The Regulation was developed and affirmed by the decision of the government of the Kyrghyz Republic No.432 of 2/09/92. This regulation determines the basic organisation and operations of book-keeping and reporting in Kyrgyzstan. It also refers to the presentation requirements for accountability of the state budget incomes.
5.4. The plan of the accounts of financial-economic activity of the enterprises (affirmed by the Ministry of Economy and Finance of the Kyrghyz Republic's order N9-p50 of 8/05/92) was put into action as of 1 January 1993.
5.5. The plan of accounts of book-keeping regulations closely follows the requirements of the international standards and are based on established management practice. The plan refers to a number of new accounts concerning particular kinds of property obligations and economic operations for general information. The plan excludes accounts which have lost their practical importance and changes the contents of many accounts in the light of new management conditions.
5.6. Nowadays in the Kyrghyz Republic there is a regulation concerning the structure of expenses included in the cost of production (of works and services), and on the formation of financial results which are taken into account when imposing tax on profit (authorised by the decision of the Government of the Kyrghyz Republic No. 11 of 11/01/93). The regulation applies to all enterprises being juridical persons under the laws of the Kyrghyz Republic and carrying out enterprise activity irrespective of the form of ownership.
5.7. Following the requirements stated in the regulations on book keeping and accountability in the Kyrghyz Republic and the plan of accounts of book-keeping, the financial reporting requirements should follow as closely as possible the requirements of the international standards.
5.8. Enterprises with foreign investments have a special form of financial reporting. This was put into action starting with the annual report for 1995.
5.9. The State agency supervising securities operations and the State Property Fund developed and implemented regulations on book-keeping and reporting of investment funds and regulations on the estimation order of pure assets of investment funds. These have become the first national standards of book-keeping in the Kyrghyz Republic.
5.10. But life, changes and the second stage of reform of book-keeping in the transition to the international standards began in January 1997. In particular, the cooperative agreement between the Government of the Kyrghyz Republic and the International Development Agency of the United States of America came into force in April 1997. In this agreement the Government of the Kyrghyz Republic undertakes to do the following:
5.11. The reforms of the accounting and the banking systems have been carried out. Since 1 January 1996 the National Bank of the Kyrghyz Republic has reformed book-keeping in the banking system according to the FMNSAK program. The National Bank together with the experts of USAID and the world currency fund have developed the new plan of accounts for central and commercial banks according to international standards of book-keeping. The following standards of book-keeping for commercial banks in the Kyrghyz Republic have been developed:
5.12. To put the Tax Code into action the national bank of the Kyrghyz Republic has developed and affirmed a temporary instruction specifying the financial and tax accountability requirements of commercial banks.
6.1. Since 1 January 1995 the Treasury system has been working in the Kyrghyz Republic. This meant the closure of all bank budget and non- budget accounts of Republican and local budget establishments and the opening of one current (transit) account of Treasury. All money resources in the current (transit) account of Central Treasury form the consolidated fund.
6.3. With the introduction of the Treasury system, the circulation of cash has increased. At the same time as the Treasury system was adopted a new classification of incomes and budget charges recommended by the World Currency Fund was accepted.
7.1. Independent audit activity is regulated by the Temporary Regulation on audit activity in the Kyrghyz Republic, authorised by decision No.33 of the government of the Kyrghyz Republic on 26 January 1993.
7.2. This regulation specifies the legal basis for undertaking audit activity in the Kyrghyz Republic and is designed to create a system of independent financial control to promote the protection of the property interests of the owner and the state.
7.3. Audits are authorised by the Council of Audit Activity, a joint body established under the Ministry of Finance of the Kyrghyz Republic, .
7.4. In the period to May 1997 the Council gave authority to 22 audit firms and 34 individuals to conduct audits. In April 1996 a Chamber of Auditors was created, uniting all auditors of Kyrgyzstan. The Chamber of Auditors organises work in conjunction with state authorities and management, the Council on Audit Activity and other organisations.
7.5. Internal audit functions have been performed by the Ministry of Finance of the Kyrghyz Republic since 1996. The Ministry controls the financial activities of organisations financed by the state budget and examines their spending against their budget objectives.
7.6. The Supreme Standing Board of state financial-economic control in the Kyrghyz Republic is the Accounts Chamber. The law setting up the Accounts Chamber of the Kyrghyz Republic was accepted by the Parliament and was signed by the President on 19 October 1996.
8.1. On the basis of the constitution of the Kyrghyz Republic and the above-stated law, the Accounts Chamber controls the Republican and local budgets and also non-budget funds and supervises the efficiency with which state funds and state property are used. An important activity of Kyrgyzstan's SAI is to address questions relating to the maintenance of control over the institutions of state power of the Kyrghyz Republic, the proper financing of the various state special-purpose programs and the usage of gold stocks etc.
8.2. At law, the authority of the Accounts Chamber extends to practically all state bodies and establishments of Kyrgyzstan, as well as public associations, non-state funds, enterprises, organisations, banks, insurance companies and other financial-credit establishments dealing with budget assets. Despite the variety of the functions of the Accounts Chamber, one of its main tasks is to control revenues and charges of the budget, which acts as the basic financial plan of the Kyrghyz state.