For weeks on end, Chynara Kanybekova, a 25-year-old housewife in Sulukta, a village in Kyrgyzstan’s southern Batken region, carefully kept her grocery store receipts.
“I gathered 106 receipts. The whole family was collecting them,” she said.
People normally discard the slips as soon as they get them, but Kanybekova had her eye on a state-run receipt lottery prize. And her persistence paid off.
Earlier this year, her number came up. And in late January, Kanybekova made the trip to the capital, Bishkek, to pick up her prize: the keys to a one-bedroom apartment, also in Bishkek.
“My husband is the youngest in his family. We are going to move to Bishkek with his parents,” Kanybekova told Eurasianet at the prize ceremony. “God willing, we’ll take part again. The competition hasn’t started yet, but we’re already collecting receipts.”
This kind of talk will be music to the ears of Kyrgyz officials. The lottery is just one of several measures they are pursuing to drag the hidden economy into the sunlight, where it can be more effectively taxed.
The scale of the challenge is daunting.
According to government figures, the shadow economy in 2021 accounted for around 21 percent, worth around 155 billion soms ($1.8 billion), of the total economy. Independent analysts believe the real proportion may be closer to 50 percent. This fiscally unaccounted-for activity tends to be in the retail, service and auto repair sectors. Bazaars, where most rural Kyrgyz people meet their basic needs, are by and large an impenetrable black box for the taxman.
In spite of his populist positioning, President Sadyr Japarov has been a leading voice in calling for an end to all this.
The authorities are taking a two-pronged approach. One is to prod the public into demanding that the businesses that serve them provide fiscal accountability. Another more arduous aspect of the agenda has been to reboot the tax code, a job that began in earnest last year. Lawmakers are still discussing proposals.
At present, there are three tax regimes for entrepreneurs. Large companies pay income tax on their own revenue, plus sales taxes, and they have to pay the income taxes of their employees to the treasury too. A second category of enterprises, with turnover of up to around 30 million soms ($350,000), have sales and income levies bundled into one single tax, for simplicity’s sake.
A third tax band has small businesses in mind. Entrepreneurs running companies with less than 8 million som ($93,000) in turnover pay for a license to operate, the cost of which depends on the scale and type of business being conducted. In 2022, the government freed this third category of any obligation to pay additional taxes. Proposals to introduce some small additional levy – something in the area of 1 percent to 4 percent of annual turnover – have been shelved for now.
This is all academic, however, unless the government has any way of determining what a given company’s turnover is in the first place.
And that is where the online cash registers, popularly known by the Russian-language acronym KKM, come in. Entrepreneurs are required to enter all transactions into the KKM, which automatically delivers the data to the tax office. With that data in hand, tax officials can decide into which band any given business should be slotted.
Small-scale traders are not fans of the KKM, however.
Zhannat Abdyrakmanova, the chief inspector for the KKM system at the state tax service, explained to Eurasianet that the authorities have been trying to introduce online cash registers since as early as 2016. Since that time, it is only supermarkets and other large companies that have been induced to adopt them.
The drive now is to get smaller enterprises – corner stores, language schools, beauty salons and so on – to finally adopt the machines.
“Last year, we set a goal of ensuring installation of cash registers at 100,000 sales and services points. […] Of that total 65,000 were installed,” Abdyrakmanova said.
Though that number fell short of the target, it is still deemed an important breakthrough in a nation deeply averse to paying taxes and wary of having their transactions closely monitored. The real hard nuts to crack will be the mega-bazaars of Dordoi, in Bishkek, and Kara-Suu, in the south of the country.
Abdyrakmanova makes a point of saying, though, that small traders are not the main problem. The biggest tax evaders are large and medium-sized businesses.
Of course, this distinction is at the heart of the whole predicament. Officials can only know what qualifies as a small business (subject to the lighter tax regime) or a mid-sized business (subject to a more onerous regime) if KKMs are used universally.
But even those 65,000 cash registers fitted in 2022 will often lie unused. Customers typically have to insist on being given a receipt, and sellers will often demur.
The lottery was one method devised to effect a change of mindset. Kanybekova and others got an apartment. The 140 or so other prizes ranged from microwave ovens to iPhones.
Abdyrakmanova said 177,000 people took part in the first round of raffles by redeeming checks worth a total of 19 billion soms ($220 million).
“This is a fabulous amount. We have never had so many checks in the history of the State Tax Service,” said Abdyrakmanova.
But as Urmat Asylbekov, a 34-year-old grocery store owner in Bishkek, told Eurasianet, shoppers quickly stopped asking for KKM receipts after January 31, when the last round of lotteries ended.
Asylbekov opened his store four years ago. It has doubled in size since that time and now covers an era equivalent to a two-bedroom apartment. Asylbekov never got around to buying a KKM register – they have to be bought – but instead installed the system on a tablet which issues electronic checks.
“The application is not straightforward. It requires a phone number from the buyer, it uses up a lot of time. Because we have schools and kindergartens nearby, we have children coming in buying lots of little things in the morning – lollipops, that kind of thing,” Asylbekov said.
With customers like that, registering every purchase is unfeasible.
Asylbekov now pays 15,000 soms ($175) for his operating license, and that is all the taxman can expect from him. His position is that he would be willing to make routine use of a KKM machine if the annual turnover tax is no more than 0.5 percent, far lower than the 4 percent some officials are envisioning.
“If the tax is 4 percent, then people will again start deceiving the taxman, bringing in grocery goods without declaring them. It will be the old corrupt scheme,” Asylbekov said.
The stakes are huge. Economist Azamat Akeneyev believes that official estimates on the size of the shadow economy are too modest. He thinks it is more than twice as big as what the government has stated.
Dragging businesses out of the dark will not only help replenish the budget, it will also inject a greater spirit of fairness and level competition into the market, Akeneyev argues.
“The shadow economy creates great opportunities for corruption. Any entrepreneur in the shadow sector creates opportunities for taking and giving bribes,” he said. “This kills the mechanism of fair competition. The country, knowledge and innovation do not develop. There is stagnation, and those who are better at evading taxation are the ones who flourish.”
Part of this is about cultural attitudes.
“Financial literacy is very poor. Most citizens are sure that the state can find money from somewhere else besides taxes,” Akeneyev said.
Underlying that commonplace is also, perhaps, the deep-lying sense that the arrangement whereby the government provides only threadbare public services while the public in return pays as few taxes as possible represents a workable balance.
But Abdyrakmanova, the tax official, sees the status quo as unsustainable. Full implementation of the KKM system is a must, she says.
“The proper regular use of cash registers can uncover up to 95-96 percent of the shadow economy. I won’t say 100 percent, but this is the only tool that can help the state reduce the scale of the shadow economy in the retail sector,” she said.
Ayzirek Imanaliyeva is a journalist based in Bishkek.