Analysis of Income Tax in Afghanistan

7/30/2019 Analysis of Income Tax in Afghanistan

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Table of Contents

CHAPTER # 01 .................................................................................3

1.INTRODUCTION .............................................................................3

1.1 Who must pay Business Receipts Tax? .............................................................4

1.2 Treatment of BRT for income tax purposes........................................................4

1.3 Tax Rates & Application....................................................................................4

1.4 Gross Receipts Subject to 5% Business Receipts Tax..........................................5

1.5 Services defined...............................................................................................5

1.6 When is BRT Paid?............................................................................................6

1.7 The Tax Form and Calculation of Tax.................................................................6

1.8 What if a business doesnt have income during the quarter?..............................7

1.9 Enforcement Provisions....................................................................................8

2.0 Where to find information?...............................................................................8

2.OBJECTIVES OF STUDY ..................................................................9

2.1 REGISTRATION AND TAX EXEMPTIONS IN AFGHANISTAN...............9

2.1.1 February 9, 2010 ..........................................................................................9

2.2 Taxes.............................................................................................................10

2.3 LIMITATION .............................................................................13

2.3.1 Soag tax exemption provision......................................................................14

2.3.2 Section B.4. Taxation...................................................................................14

CHAPTER # 2..................................................................................14

1.Literature view .................................................................................................15


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CHAPTER # 03................................................................................23

1.METHODOLOGY ..........................................................................23

1.1 Introduction ..................................................................................................24

1.2 Data collection Method& Data source plan:......................................................24

1.3 Data analysis methods: ..................................................................................24

1.4Assumption & Limitation:.................................................................................25

1.5 Time scale:.....................................................................................................25

CHAPTER # 4 .................................................................................26

4.1 Results and discussion ...................................................................................26

4.2 Status and nature of business...........................................................................4

4.3 Basis of preparation.........................................................................................4

4.4 Summaries of significant accounting policies.....................................................4

4.5 ENTERPRICE IN AFGHANISTAN .......................................................................8

4.6 RISK MANAGEMENT.......................................................................................14

CHAPTER # 05 ...............................................................................16

CONCLUSION AND RECOMMENDATIONS...........................................16

5.1. Discussion ....................................................................................................16

5.1 .Conclusion ...................................................................................................16

5.1.1 Tax Laws....................................................................................................17

5.1.2 Tax Exemptions ..........................................................................................17

5.2 Recommendation ...........................................................................................18

5.3 Reference ......................................................................................................18


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Chapter # 01

1. Introduction

Commerce and trade have been the lifeblood of Afghanistan since the nation was born in the

eighteenth century. Afghanistan sits at the crossroads of major trade routes that link Asia and

Europe and have shaped the course of world history. The fabled Silk Road passed directly through

Afghanistan and was the chosen route for caravans bringing goods from China, India, and the

Arabian Peninsula.

As Afghanistan emerges from three decades of violent conflict, commerce and trade are once again

the keys to its future. Economic development will help bring stability, peace, and prosperity to

Afghanistan. But economic growth does not occur in vacuumit is closely linked to the

establishment of the rule of law. A clear and effective framework of laws and independent tribunals

facilitates commerce and encourages economic growth. Commercial laws and institutions, in

particular, are crucial for sustained economic development because they regulate commercial

transactions.

Commercial law and institutions empower commercial actors and enable them to expand, compete,

resolve disputes, access markets, and trade with relative ease. Good commercial law enables

landowners to tap into their propertys value, facilitates access to capital, streamlines procedures

for registering a company, and ensures the enforcement of contracts and debt. Good institutions are

also crucial because illogical and inefficient bureaucracies, unreasonable administrative costs,

and widespread corruption undermine commercial law. Broad-based economic development

requires institutions and individuals, such as the courts, judges, registries, lawyers, the private

sector, and non-governmental organizations (NGOs).

Thesis will explore the linkages between commercial law and economic development in both

theory and practice. It begins with a brief overview of Afghanistans economy, including major

macroeconomic indicators. Next, it analyzes the business environment in Afghanistan. It then

provides an overview of Islamic commercial law, which has shaped commerce in Afghanistan for

centuries. The second part of the Chapter focuses on the empirical connections between rule of law

and economic growth. This section will explore the role of commercial law and institutions in a

countrys economic development.


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1.1 Who must pay Business Receipts Tax?

A legal person (corporation, limited liability company, partnership, etc.) must file a quarterly

return and pay tax for the quarter.

A natural person having gross receipts of AFN 750,000 or more per quarter must file a quarterly

return and pay tax for the quarter.

However, a natural person who owns a hotel, restaurant, or guesthouse, and whose quarterly gross

receipts are less than AFN 750,000, still must file a quarterly return and pay tax for the quarter.

1.2 Treatment of BRT for income tax purposes

BRT paid is considered to be an ordinary and necessary expense of doing business and is

therefore deductible from gross income when computing taxable income for the year.

1.3 Tax Rates & Application

There are three rates for Business Receipts Tax: two percent, five percent, or 10 percent with

rates applied on gross receipts based on business type as specified in the Income Tax Law 2009.

Gross Receipts Subject to 2% Business Receipts Tax

All gross receipts are subject to two percent with the following exceptions:

Hotel services

Restaurant services

Telecommunications services

Airline services

Halls and clubs services as related to events

The income of a hotel, restaurant, or guesthouse with gross receipts less than AFN 750,000 per

quarter is subject to two percent BRT.The gross value of imports (including any customs duties

paid) is subject to two percent BRT. The two percent BRT paid on imports will be allowed as anadvance payment for business receipt tax payable. If the amount paid at the time of import is more

than the business receipt tax for that year the excess amount is not allowed as credit in the

subsequent year.


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1.4 Gross Receipts Subject to 5% Business Receipts Tax

Gross receipts from halls and clubs where events are held

(such as wedding halls).

Gross receipts from restaurants, hotels, and guesthouses

with gross receipts of AFN 750,000 or more per quarter

Gross Receipts Subject to 10% Business Receipts Tax

Gross receipts of restaurants and hotels considered luxury hotels and

restaurants.

Gross receipts or income for telecommunication and airline services regardless of whether the

taxpayer has passed the tax onto the customer

1.5 Services defined

A legal person (corporation, Limited Liability Company, partnership, etc.) or a natural person

operating as a sole proprietor providing a service as defined in categories listed below must file a

return and pay tax on a quarterly basis.

Hotel services means the provision of sleeping accommodation and related services, including

the provision of meals, beverages, laundry and communications services, to persons who occupy

such accommodation as transient guests.

Restaurant services means the provision of food or beverages by an establishment that provides

facilities for immediate consumption at that establishment, or catering services of prepared food; or

sales of cooked foods that were prepared on the premises.

Telecommunication services means the provision of any kind of telephone, internet, or fax

service.

Airline services means passenger air services where the flight originates in Afghanistan.

1.5.1 How might these rates vary for a single business?

Applicable BRT rates can vary based on the business activity generating income as documented

by relevant gross receipts.

Example 1: Kabul Nights Restaurant, a legal person, is a fine dining restaurant taxed at 10 percent

on its restaurant services. The restaurant also sells traditional handicrafts, which are taxed at a 2


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percent rate.

1.5.2 How might these rates vary for by quarter?

Example 2: Ahmad, who is a sole proprietor, recently opened a restaurant in Kabul. Monthly gross

sales of the restaurant for the first three months (Mizan, Aqrab and Qaus) were AFN 274,000.

Since sales for the quarter were less than AFN 750,000, the business (although a sole proprietor)

will have a business receipts liability at two percent of gross receipts for the quarter, or AFN

5480.

Example 3: Ahmads restaurant has become well known and business has increased significantly.

His gross receipts for Hamal, Saor, and Jowza were AFN 970,000, which exceeds the AFN

750,000 threshold. Therefore, Ahmad must pay BRT for the quarter at 5 percent, or AFN 48,500,

1.6 When is BRT Paid?

Tax forms and payments are due on a quarterly basis using the solar calendar. Tax payments shouldbe made in afghani at Da Afghanistan Bank no later than the 15th day following the end of thesolar quarter in which the sales were made.

Quarter Due Date Hamal Jowza 15Saratan Saratan Sunbala 15 Mizan Mizan Qaus 15Jeddi Jeddi Hut 15 HamalExample 4: During the 3rd quarter (Mizan-Qaus) of the solar year, ABC Company received

AFN 200,000 in commissions and AFN 100,000 from the sales of products. ABC Company has

calculated its tax due on the receipts from commissions and from sales of products as AFN 6,000

[AFN 200,000 + AFN 100,000) x 2%]. ABC Company would file this return and pay the amount

due at Da Afghanistan Bank no later than 15 Jeddi.

Example 5: From Example 3 above, Ahmad has calculated his tax due on the AFN 970,000 for

Hamal, Saor, and Jowza as AFN 48,500. Since the return and tax are due on a quarterly basis, he

would complete his form and file this return and pay the tax at Da Afghanistan Bank no later than

15 Saratan.

1.7 The Tax Form and Calculation of Tax

The four part BRT form requires name, address, taxpayer identification number (TIN), business

type, gross receipts for each type of BRT, total tax for each type of BRT and total tax payable.

One copy is filed with the cashier at Da Afghanistan Bank when the tax is paid. The bank will

send two copies of the form to the Ministry of Finance. Taxpayers retain a fourth copy for their


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records.

If BRT has been withheld and paid during the quarter, for example, BRT withheld from

payments for fulfilling government contracts, it needs to be included in the calculation of tax on the

BRT form.

Example 6: From Example 1 above, Kabul Nights Restaurant has receipts from restaurant services

(food, beverages, etc.) subject to 10 percent BRT and receipts from sales of handicrafts subject to

two percent BRT.During the second quarter of 1389 Kabul Nights had gross receipts from sales of

handicrafts of AFN 320,000 for the quarter. Kabul Nights paid AFN 2,000 BRT on some items it

imported for its business in the first week of the quarter. It also had gross receipts from restaurant

services of AFN

1,050,000 for the same three months. Kabul Nights wouldreport this income by 15 Mizan 1389 as

follows:

Quarterly Tax Period From Saratan To Sunbala

2% Business Receipts Tax

Line 11 - Gross receipts of goods and services 320,000

Line 14 - Total for Quarter 320,000

Line 15 - Quarterly Tax (multiply by 2%) 6,400

10% Business Receipts Tax

Line 20 Gross receipts of luxury or premium hotels and

restaurants 1,050,00

Line 22 - Total for Quarter 1,050,00

Line 23 - Monthly Tax (multiply by 105,00

Line 24 - Total Tax Due For Quarter 111,40

Line 25 - Total BRT paid during 2,00

Line 26 - Total Payment Due 109,40

1.8 What if a business doesnt have income during the quarter?

If a business meets the tests for the BRT categories discussed in this guide, but has no receipts

for the quarter, the taxpayer must still file a return with a statement attached explaining that the

business had no gross receipts during the quarter.

Remember that BRT is applied to gross receipts and not net profits. If the claim is accepted, the


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business will not be subject to BRT for the quarter. If,however, the claim is found to be false,

the business willincur additional tax as a penalty (under Articles 100 and104 of the Income Tax

Law) in addition to the tax owed.

1.8.1 Income exempt from Business Receipts Tax

a) Income received from Interest Export of goods and services Rent or lease of

residential property to a natural person providing that the tenant uses the property for residential

purposes for more than six months of the tax yearSale of the property by a natural person outside

of the ordinary course of the natural persons business. A sale is considered to be outside the

course of the natural persons business when such sales are not regular and continuous.

b) Fees earned from the exchange of currency, operation of savings or other bank

accounts, transaction from deposits or withdrawals, issuance of checks and guarantee letters, internet

banking, provision of mortgages or loans, provision of lines of credit

c) Issuance of cash-settled contracts pending a specificdate in the future

d) Future contracts settled by physical delivery

e) Premiums for the provision of insurance or re-insurance

f) Distributions received by a shareholder from a corporation, limited liability

company or partnership with respect to the shareholders stocks or partnership interest

g) Salary or wages

1.9 Enforcement Provisions

Failure to comply with the requirements of the Income Tax Law may result in the Ministry of

Finance using administrative powers within the tax law to ensure compliance.

2.0 Where to find information?

Afghanistan Revenue Department tax offices and Mustufiats provide forms, instructions, and

guides to taxpayers free of charge, available both as printed and as downloadable versions from a

new website http://www. ard.gov.af. The website also provides locations, contact numbers and

hours of operation for Afghanistan Revenue Department tax offices and Mustufiats. Taxpayersalso can download other useful information including various public announcements and rulings,

questions & answers regarding wage withholding tax, the Income Tax La 2009, and an

Income Tax Manual. The manual discusses separately each article of the law, along with

relevant regulations, often with helpful examples.


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2. Objectives of study

2.1 Registration and tax exemptions in Afghanistan

2.1.1 February 9, 2010

The purpose of this information sheet is to provide guidance to partners on how to register to legally

operate in Afghanistan and to provide guidance on applicable tax exemptions. The information provided

in this document should not substitute for each implementing partner seeking its own registration and

tax advice. USAID expects each of its implementing partners to fully comply with the laws of the Islamic

Republic of Afghanistan (IRoA)

Questions related to USAID tax exemptions and problems encountered with registration and the payment

of taxes where exemptions apply should be brought to USAIDs attention immediately

2.1.2 REGISTERING AS AN NGOThe Afghanistan NGO Law was enacted on June 7, 2005, for the purpose of regulating the activities

of domestic and foreign NGOs in Afghanistan. It p r o v i d e s the t e r m s of

establishment, registration, administration, activity, internal supervision, dissolution and liquidation of

property of domestic and foreign NGOs. The law may be found in the Official GazetteNo.857/2005.

2.1.3 What is an NGO under the laws of Afghanistan?

An NGO is a domestic or foreign nongovernmental, nonpolitical and notforprofit

organization.1 A foreign NGO is established outside of Afghanistan according to the laws of a foreign

government.

2.1.4 How to Register an NGO in Afghanistan?

NGOs are registered by the NGO Department within the IRoA Ministry of Economy (MoE), which is

responsible for both registering and supervising NGOs. There are two key laws that govern the

establishment, registration and operations of civil society organizations: the Law on Social

Organizations enacted November 2002 and the Law on NonGovernmental Organizations enacted

June 2005

Reference

1 Article 5.1.2.3.4.5 Afghanistan NGO Law2 Articles 11, 18 & 27 Afghanistan NGO


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For NGOs receiving USAID funds, the entity must first proceed to the Ministry of Foreign Affairs

(MoFA) with a letter from USAID3

introducing the organization as a USAIDfunded organizationto the MoFA for registration. The MoFA then sends the information to the MoE to register the

entity as an NGO. According to the Afghanistan NGO Law4

, an NGO must submit a semiannualactivity report and an annual activity report to the MoE. Failure to submit the reports could result in

the dissolution of the NGO. The semi

annual report should be prepared in one original and threecopies for submission to the central and regional offices of the MoE. In addition, an NGOmust provide its annual financial statements/reports, prepared in accordance with internationalauditing standards, to the MoE.

2.1.5 How to register For Profit Entities?

In order for a forprofit entity to register and begin work in Afghanistan, it must first register with the

Afghanistan Investment Support Agency (AISA). AISA issues licenses for investors in manufacturing,

health services, construction and the service sector such as consulting and security services.There

are several forprofit entities (not NGOs) which are USAID partners/contractors implementing

USAID funded programs in Afghanistan. These entities are registered at AISA as

consulting/advisory services organizations implementing foreign donor assistanceprograms.

To register, the forprofit entity must first proceed to the MoFA with a letter from USAID

introducing the organization as a USAIDfunded organization to the MoFA for licensing at AISA.5

The MoFA then sends the information to AISA to license the entity as a forprofit entity. The

implementing partner collects and completes the AISA forms and submits them to the licensing

department of AISA. AISA then sends a letter to the Ministry of Finance (MoF) requesting

information on whether the organization is exempt from taxes in

accordance with our bilateral agreement with the GIRoA.

Once the AISA forms are completed, information on the organization is also sent to the CentralBusiness Registry (CBR) for registration. The CBR is a one stop shop to register businessescombining all of the functions previously done by the Commercial Court, the Ministry of Justice(MoJ) and the MoF. The CBR facilities the registration process for all businesses. The CBR issues

the partner a Tax Identification Number (TIN)6

, registers the business and publishes the informationin the Official Gazette of the MoJ.

2.2 Taxes

2.2.1 Tax Exemptions under Afghanistan

Tax Law

Afghanistans Income Tax Law, enacted in 1965 and amended in 2005 and most recently in

2009, was modeled on the U.S. tax law. Article 10 of the IRoA Income Tax Law defines a category

of "Tax Exempt Organizations similar to a charitable organization under Section

501(c)(3) of the U.S. IRS Code. To qualify as an exempt organization under Article 10, an

organization must be (1) established under the laws of Afghanistan, (2) organized and operated

exclusively for educational, cultural, literary, scientific, or charitable purposes and (3) contributors,

shareholders, members or employees either during the operation or upon dissolution ofthe organization

must not benefit from the organization. The contributions and income received from the necessary


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operations of qualifying organizations are exempt from taxation.

2.2.2 Annual Tax Filing

The 2009 amendments to the Income Tax Law provide details of on the legal requirement for annual

tax filing. Even though an entity may be exempt from taxes, the organization is still required to file atax return if they fit the criteria as outlined in Article 87, regardless of the fact that they may owe no

tax. Failure to file a return may result in penalties for failing to file. Annual income tax returns, as

well as all other tax returns, are available at the Medium Tax Office.

2.2.3 Tax Exemptions for USAID Partners

The Point Four General Agreement for Technical Cooperation, dated February 7, 1951, is the framework

bilateral agreement for all USAID activities in Afghanistan. It includes a provision that statesthat:

Any funds, materials and equipment introduced into Afghanistan by the Government of the

United States of America pursuant to such program and project agreements shall be exempt

from taxes, service charges, investment or deposit requirements, and currency controls.

Subcontractors, subject to this Article are required, upon signing the subcontract, to send a copy of the

subcontract to the Medium Tax Office. Natural persons who earn taxable salaries are excluded

from this provision. Under the USAID Tax Exemption language in our SOAGs, the withholding only

applies to national subcontractors, i.e. Afghan subcontractors.

Foreign subcontractors are exempt from such withholding. However, USAID prime

contractors/partners are not exempt from withholding this tax on their Afghan subcontractors.

The SOAG ex em pt s nonnational organizations and persons from the withholding not

Afghan organizations or Afghan citizens.

Foreign/International subcontractors to USAID prime contractors are exempt from taxes under the

SOAGs, similar to their prime contractors. However, the legal division of the Afghanistan Revenue

Department (ARD) must issue a letter (exemption certificate) to each exempt subcontractor in order to

effect the exemption for administrative purposes under Afghan law.

3The MoFA normally requires a letter of introduction from the Consular Office of the US Embassy in Kabul. However,

the Consular Office has delegated the authority to provide introduction letters to USAID/Afghanistan. The delegationletter, Attachment 2, must be attached to the USAID introduction letter.4

Articles 27 & 31 of Afghanistan NGO Law5 The same delegation letter referenced in footnote 3 and found at Attachment 2 must also be attached to the

USAID introduction letter to the MoFA for for-profit entities.6

TIN: Individuals, companies and organizations which are, according to the Income Tax Law and the CustomsLaw, required to pay taxes or customs duties; social, non profit and welfare organizations which are required to withholdtaxes from the salaries or wages of their employees are required to have a TIN.

In other words, each subcontractor must have an official exemption letter from the ARD. To obtain the

exemption certificate, the prime contractor submits a letter to the ARD Legal Department on behalf


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of its subcontractors requesting the exemption, i.e. a private ruling. A copy of the subcontractors

cover sheet to its contract must be included with the request The Legal Department of ARD has copies

ofthe SOAG, so it is not necessary to provide the SOAG as an attachment. The letter howevershould

reference that the prime and the subcontractor are implementing a USAID activity under the applicable

SOAG. The Legal Department will review the documents and issue a letterconfirming exemption. If

the exemption letter is not issued by ARD, the subcontractors will not be exempt fromtax.

2.2.4 Scope of study

Question 1: Do the Tax Exemption Provisions in the Bilateral Agreement and SOAGs

Provide a Blanket Tax Exemption for All USAID Implementing Partners for All Taxes in

Afghanistan?

No. For USAID implementing partners, the tax exemptions described here only apply to funds

provided by USAID. For funds received from any other source, including other U.S. Government

agencies, implementing partners should check with those donors to determine whether any such non

USAID funds also benefit from a tax exemption. In addition, there are different tax exemptions for

national and nonnational organizations.

Question 2: How do the Tax Exemptions Affect Payment of the Rental Property Tax in

Afghanistan?

The rental property tax imposes a withholding tax on landlords for real property as follows:

If the monthly rent is more than Afs.10, 000 ($200) and less than Afs.100, 000 ($2000)

10percent.

If the monthly rent is more than Afs.100, 000 ($2000) 15percent.

The law requires the renter to withhold the tax on behalf of the landlord. The rental property

tax is a tax on the landlord not on the renter. The withholding is merely

transferring a part of the landlords income (the rent) to the GIRoA to cover the tax.

Whatever the arrangement between landlord and renter, the USAID tax exemption is not applicable

since the tax is on the landlord.

Question 3: How do the Tax Exemptions Affect Payment of the Income Tax in

Afghanistan?

In Afghanistan, there is an income tax on organizations and individuals. There is also a business

receipts tax (BRT) which is a type of income tax on gross receipts of forprofit organizations.

The tax exemption described above exempts all nonAfghan national implementing partners (both

organizations and individuals) from paying taxes on their income, profits, or property. This includessocial security or other similar type of taxes. The exemption does not extend to Afghan nationals.USAID implementing partners are required to withhold income tax on their Afghan national

employees7

and subcontractors including BRT8, The BRT is a tax which

is collected from total gross income (sales) before any deduction. The exemptions are not applicable

to Afghan organizations even though they are receiving USAID funds. Once again, however, it should

be noted that the exemption only applies to USAID funds. Funds received

by organizations or individuals that cannot be tracked back to USAID is not subject to the exemption.

If organizations or individuals are receiving funds for assistance activities from other donors or other

U.S. Government agencies, they should check with those donors or other U.S. Government agencies


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to see if any tax exemptions are applicable to such funds.

Question 4: How do the Tax Exemptions Affect Payment of Customs Duties, Tariffs,

Import Taxes or Other Levies on the Importation, Use and ReExportation of Goods into or out

ofAfghanistan?

The tax exemptions apply to all goods brought into the country for use on a USAID

financedassistance project. The exemption applies to such goods whether they are brought in by Afghan

national or nonAfghan implementingpartners.

In addition, nonAfghan implementing partners may bring in personal belongings and effects for the

nonAfghan national employees (including personallyowned automobiles, for example) for

personal use (not for resale, however) and for the personal use of their family members.

Question 5: How do the Tax Exemptions Affect Payment of the VAT, Sales Taxes, Taxes on

Purchases or Rentals of Real or Personal Property or other Taxes Levied on the Last

Transaction for the Purchase of Goods or Services

Financed by USAID in Afghanistan?

To the extent that such taxes are imposed, the tax exemption will apply for goods and services

purchased for use in activities financed by USAID. To the extent the purchase of a good or service

would not be an allowable cost under an implementing partners agreement with USAID, the exemption

would not apply (for example, individual employees purchases of personal effects are not

allowable costs under USAID assistance agreements and therefore would be subject to the sales tax

should one be instituted in Afghanistan).

Question 6: What Happens if the GIRoA Collects a Tax Despite the Existence of an

Applicable Tax Exemption?

USAID will work with the GIRoA through the MoF to try to ensure that, when exemptions apply, no

taxes will be collected. However, it is likely that there will be cases where taxes will be collecteddespite the best intentions of all parties to comply with the terms of the Bilateral Agreement and

SOAGs. USAID agreements with implementing partners should contain a provision related to

reporting of foreign taxes. If an implementing partners agreement does not contain such a

provision, it should contact its USAID Contracting Officer or Agreement Officer and request inclusion

ofsuch standard provision. USAID will then seek reimbursement of reported taxes from the GIRoA.

7The income tax of legal persons is 20 percent of its taxable income in the fiscal year

From Afs.0 to Afs.5,000 monthly - 0% From Afs.5,001to Afs.12,500 - 2%

From Afs. 12,501 to Afs. 100,000 - 10% + Afs. 150 fixed amount

From Afs. 100,000 above - 20% + Afs.8,900 fixed amount

8BRT is imposed on natural persons who provide goods or services in exchange for consideration and whose revenue from such sales is 750,000

Afghanis or more per quarter of the year

2.3 Limitation


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2.3.1 Soag tax exemption provision

2.3.2 Section B.4. Taxation

(a) General Exemption: The Agreement is a program agreement under the terms of the Point Four General

Agreement for Technical Cooperation, dated as February 7, 1951, between the grantee and the USG, and

the assistance thereunder is free from any taxes imposed under laws in effect in the territory of the

grantee.

(b) Except as provided otherwise in this provision, the General Exemption in subsection (a) applies to

, but is not limited to 1) any activity, contract, grant of other implementing agreement financed

by USAID under this agreement, 2) any transaction or supplies, equipment, materials, property or

other goods (hereinafter collectively goods) under (1) above, 3) any contractor, grantee, or other

organizations carrying out activities financed by USAID under this agreement, 4) any employee of such

organizations, and 5) any individual contractor or grantee carrying out activities financed by USAID under

this agreement.

(c) Except as provided otherwise in this provision, the General Exemption in subsection (a)

applies to , but is not limited to the following taxes:

1) Exemption 1. Customs duties, tariffs, import taxes, or other levies on the

importation, use and reexportation of goods or the personal belongings and effects (including

personallyowned automobiles) for the personal use ofnonnational individuals or their family

members. Exemption 1 includes, but is not limited to; all charges based on the value of such

imported goods, but does not include service charges directly related to services performed to

transfer goods orcargo.

2) Exemption 2. Taxes on the income, profits or property of all 1) nonnational

organizations or any type, 2) nonnational employees of national and nonnational

organizations, or 3) non

national individual contractors and grantees. Exemption 2 includes

income and social security taxes of all types and all taxes on the property,personal or real, owned

by such nonnational organizations or persons. The term national refers to organizations

established under the laws of the grantee and citizens of the grantee, other than permanent

resident aliens in the US.

3) Exemption 3. Taxes levied on the last transaction for the purchase of goods orservices

financed by USAID under this agreement, including sales taxes, valueadded taxes (VAT), or

taxes on purchases or rentals of real or personal property. The term last transaction refers to

the last transaction by which the goods or services werepurchased for use in the activities finances

by USAID under this agreement.

(d) If a tax has been levied and paid contrary the provisions of and exemption, USAID may, in its discretion,

1) require the Grantee to refund to USAID or to others as USAID may direct the amount of such tax withfunds other than those provided under the agreement, or 2) offset the amount of such tax from amounts to

be disbursed under this or any otheragreement between theparties.

(e) In the event of a disagreement about the application of an exemption, the Parties agree to promptly meet

and resolve such matters, guided by the principle that the assistance furnished by USAID is free

from direct taxation, so that all of the assistance furnished by USAID will contribute directly to the

economic development of the country of the Grantee.

Chapter # 2


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1. Literature view

1.1 Taxation and Governance

The fundamental purpose of taxation is to raise revenue for financing public goods and services. An

effective tax system therefore strikes an appropriate balance between public and private needs toachieve national development goals, given the prevailing structural and social conditions and

political priorities (European Commission 2010a, 2).

Developing countries, in particular, need to establish a tax system that is not only effective in

mobilizing resources, but also one that distributes the tax burden fairly and minimizes tax

distortions that can deter productive investment, spur costly resource misallocation, and impair

growth. As the OECD (2008b, 21-2) points out, low-income countries face special challenges that

affect the feasibility of raising taxes, including widespread poverty and illiteracy; hard-to-tax groups

in subsistence agriculture and the informal sector; problematic accounting in the private sector; and

a lack of skills for tax administration (including control of international tax leakages).Beyond these economic fundamentals, donors and development practitioners are deeply concerned

to promote Good Governance in tax matters (EC 2010a, 2). The governance perspective focuses

on how taxation affects state capacity, responsiveness, and accountability, the political drivers of tax

reform, and governance constraints on the effectiveness of donor-supported tax programs.

Four themes are prominent in the literature on taxation and governance. First, taxation is a central

feature of the social contract on the role of the state, as defined by political institutions, influence

networks, economic interests, social relationships, and government capabilities in each country. An

effective program to strengthen a countrys tax system has to take into account the commitment of

national leaders, the influence of interest groups, the political incentives for sustainable reform, the

role for policy dialogue, and the quality of information available to decision makers and

stakeholders on the effects of tax decisions. As Prichard (2010, 323) concludes from detailed case

studies for Kenya, Ethiopia and Ghana, domestic political factors ultimately determine the course of

tax reforms. Aid programs to support the tax system can only work when reforms are consistent

with the domestic political agenda and they work best when accompanied by high-level political

support. Hence, an understanding of the political economy of reform can be just as important as the

technical analysis.

A second theme is that taxation itselfalong with effective expenditure managementis a corecapability for state-building and a basic component of good governance. Tax reforms can also be a

point of entry for fostering broader improvements in state capacity (Brautigam 2008, 15). Any

serious program for strengthening revenue performance creates a need for strengthening related

functions like budget management, fiscal policy analysis, courts and the judiciary, and the agencies

responsible for.

The IMF (2011) points out that the combined impact of the tax system and the government

expenditure program is what matters for equity and poverty relief. Nonetheless, an equitable tax

system imposes a minimal burden on the poor and ensures that everyone pays their fair share.


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This two-way interaction between taxation and governance suggests that there can be a virtuous

circle in which tax reforms lead to governance improvements that in turn facilitate revenue

mobilizationleading to more financing for essential public services, stronger government

legitimacy, and faster progress towards ending aid dependency.

1.2 Afghanistan

The Afghanistan case also highlights important political economy issues concerning tax reform in a

low-income/post-war context. Afghanistan has one of the weakest tax collection capacities in the

world. According to IMF estimates, government revenue as a percentage of non-drug GDP will be

5.4 percent in 2005-6, the lowest figure for any country in the world (Rubin, 2006: 26). James

Boyce (2003: 7-8; forthcoming) suggests that fiscal capacity has been crucial for the viability and

sustainability of the state, particularly given the short attention span and shifting priorities of

external donors. What seems clear in the Afghan case is that the states command over legitimateforce and legitimate fiscal capacities are closely interlinked, once again highlighting the limits of a

purely technical approach to taxation.

There are several insights on the relationship between state-building and public finance that are

highlighted in Boyces work. First, there were three main principles that were important as

foundations of sound revenue collections: a) the methods chosen should be easy to handle

administratively; b) they should honour progressivity in order to reduce rather than exacerbate

distributive tensions by taxing those with ability to pay; and c) they should be underpinned by

legitimacy.

Second, there is a need to re-think the policy of exempting high-income expatriates from paying

taxes despite the fact that they often earn 100 times the national average salary. This exemption

creates a demonstration effect to high-income nationals that it is legitimate for upper income groups

not to contribute to tax collection. Boyce points to three tax measures which would help the

international community to play a catalytic role in the revenue area, analogous to its potential role in

the expenditure and security arenas:

a) the introduction of an income tax on high income expatriates, voluntarily paid and a measure of

high symbolic value;

b) the introduction of income and urban property taxes on high income citizens because the influx

of external resources is a major source of a considerable increase in income for some well-placed

Afghan citizens; and

c) a customs duty on imported luxuries that is backed up by the willingness of international actors

to forego exemptions and immunities. Such measures could easily be put into practice

administratively and work as a nucleus of revenue collection capacity while at the same time would


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enhance legitimacy. It would also set the stage for state-elite bargains over tax collection to become

an institutionalized feature of the polity.

Given the weak state capacity to collect tax in Afghanistan, trade taxes will inevitably be the most

feasible source of tax collection. However, raising the level of import taxes is not simply a question

of trade policy. The inability of the Afghan state to control much of the territory outside the capital,

Kabul, including border areas, impedes the collection of trade taxes. The presence of entrenched

warlords weakens the states monopoly not only on revenue collection but also on the legitimate

exercise of force (Boyce, forthcoming). In this sense, raising trade taxes will require increased

military and security presence of the central state in border regions, a feat unlikely to be achieved

without international military assistance. Clearly, in post-war economies, capacity to collect even

the easiest taxes is closely linked to issues of security and the legitimate monopolisation of

violence on the part of the central state.

Carnahan (2007) argues that it makes sense for donors to enter into a multi-year compact with post-conflict host government to provide matching funds for direct budget support purposes. The current

arrangement in many post-conflict countries is that donors provide budget support when the

government specifies its expenditure needs and calculates what its financing gap is. Donors then

promise-with varying degrees of commitment, promises to finance the revenue shortfall. This

system can create several problems. First, the incentive for the government to raise revenue may be

diminished. Second, the capacity of the government to identify and assess macro-level expenditure

revenue trade-offs are reduced as ministers are not forced to prioritise spending based on what

revenues they can collect; instead they simply present a wish list. Third, there is considerable

uncertainty and volatility in the actual aid flows that are dispersed creating problems for

macroeconomic management and planning.

The literature suggests that economic development is expected to bring about both an increased

demand for public expenditure (Tanzi, 1987) and a larger capacity to meet these demands

(Musgrave, 1969). Musgrave argues that the lack of availability of tax handles might limit revenue

collection at low levels of income and these limitations should become less severe as the economy

develops. Effectiveness of measures for increasing tax revenue must be estimated in order to

identify their success. Analysis of buoyancy rate is a means for evaluating the effectiveness of

policies for improvement in tax revenue. Since gross investment is one of the components of

aggregate demand therefore tax buoyancy with respect to investment should also be estimated.

There is a consensus in the literature on the use of per capita income as a proxy for the overall level

of development. (Bahl, 1971 and Ansari, 1982). A higher per capita income reflecting a higher level

of development is held to indicate a higher capacity to pay taxes as well as a greater capacity to levy

and collect tax revenue (Chelliah, 1971). But it is also possible that per capita income cannot reflect

the real impact on tax buoyancy due to uneven income distribution in the economy. Therefore in

this study income per capita is not selected as an independent variable. Today the human

development index (HDI) is sometimes considered to be a better indicator of welfare than income


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per capita. However due to non-availability of timely HDI data, HDI is also not taken into account

in this study.

Tanzi in a study emphasizes that trade taxes have historically been a major source of government

revenue during the early stages of economic development because they are easier to collect than

domestic income and consumption taxes when tax administration is rudimentary and tax handles are

limited, (Tanzi 1989). This is also supported by a study by Linn and Weitzel (1990) which shows

that the administrative ease with which trade taxes can be collected makes them an attractive source

of government revenue when administrative capabilities are scarce (Linn and Weitzel, 1990).

Therefore volume of trade has been given importance as a determinant of tax revenue specially in

developing countries at early stages of development.

The existence of a large public debt has important implications for the taxation potential of a

country. With a large debt, the government needs to raise revenues necessarily. When the interest on

the debt exceeds net borrowing plus the possible reduction in non- interest expenditure, the level oftaxation must go up unless the rate of growth of the economy is high enough to neutralize this

increase. Therefore public debt and government spending play a role in determining the extent to

which countries may take advantage of their taxable capacity (Tanzi, 1987). Therefore this study

also considered debt as a determinant. Public debt may be financed through inflationary financing,

which results in acceleration of inflationary pressure. As a result the real value of tax collection falls

because of the inevitable lag between the date the tax is due and its date of collection (Tanzi, 1988,

1989, Blejer & Cheasty, 1989; Linn & Weitzel, 1990). Therefore, the size of the public debt is

expected to be a positive determinant of the buoyancy rate.

A countrys economic structure is one of the factors that could be expected to influence the level of

taxation (Tanzi, 1992). An economy with a large GDP share of agriculture value added is expectedto generate low tax revenues. Due to political reasons, it is usually difficult to directly tax the

agricultural sector in Afghanistan, though it is often very heavily taxed in many implicit ways, e.g.,

through import quotas, tariffs, controlled prices for output, and overvalued exchange rates (Bird,

1978; Ahmad and Stern, 1991).

Tax evasion is considered to be of serious concern to those dealing with taxation issues of a country

because of several reasons, the major being that it results in the loss of revenue. Pyle (1989) points

out that one of the implications of the existence of the underground economy is that some income

goes untaxed and also certain indirect taxes are also evaded. Thus in this study a short fall in tax

revenues (SFTR)1 will be considered as a proxy to represent tax evasion. These shortfalls in tax

revenues are normally inclusive of those shortfalls that are due to tax avoidance but not tax evasion.

The expected sign of buoyancy rate for tax revenue due to SFTR is negative.

Estimating income tax elasticity is useful for determining the extent of the sensitivity and response

of the tax system to the changes that take place in the composition and value of GDP. Moreover, a


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quantitative measure of the effectiveness of tax policy in terms of stimulating public resources, is

given by the relationship between the proportional changes in tax revenue and those of national

income (Harvey, 1993), and this relationship is measured by income tax elasticity. The elasticity of

yield is an important aspect of the tax structure (Goode, 1984), and overall measures of elasticity

and buoyancy may be useful as a descriptive tool, which may lead to further questions and point to a

more detailed examination of particular taxes in certain countries (Ahmad and Stern, 1991).

There is a large literature on public finance policies and systems in developing countries that

explores various options for raising revenue (collecting taxes, fees, and rents, foreign borrowing,

expanding the money supply), various criteria for allocating expenditure (equity, efficiency), and

optimal means for managing and executing expenditures (autonomous revenue authorities,

tax/customs administration, financial management and treasury systems, etc.). Several handbooks

summarize these lessons for policymakers (see, for example, World Bank 1998, McLaren 2003).

This literature also discusses how fiscal policy impacts and is impacted by macroeconomic

stabilization, economic liberalization, poverty reduction, fiscal sustainability, etc. (see, for example,Bird and de Jantscher 1992, Patel 1997, Toye 2000).

There is little discussion of the unique challenges faced by post-conflict countries (i.e., post-war

crime waves, implementation of costly peace agreements, war economies, political and social

polarization, low absorptive capacity and dramatic spikes in international aid) and the extent to

which this larger literature is still applicable in post-conflict settings. Fafo organized one meeting on

post-conflict public finance at the World Bank in 1999 at which considerable interest was expressed

in developing new research in this area (Fafo 1999). Addison and Ndikumana (2001) argued that the

new state agenda in Africa is both ambitious and essential and generating additional revenues to

address the fiscal crisis of the African state is a precondition for statebuilding in Africa.

These fiscal crises are most severe, they argued, in conflicted and post-conflict countries, calling for

reduced military spending; more grant aid, and more debt relief to free up additional resources for

core spending. They did not address cases outside Africa nor examine how to prioritize non-defense

expenditures. While Addison and Ndikumana cast fiscal policy as a precondition for statebuilding,

Bird et al. (2004) argue that a more legitimate and responsive state is a precondition for improving

fiscal policy, bringing in societal factors often overlooked in the public finance literature (but not

looking specifically at post-conflict countries). Addison and Roe (2004) examine the fiscal costs of

conflict and explore strategies for revenue mobilization in post-conflict recovery, exploring the

strongly criminal dimension that many conflicts take on and the particular challenges this raises for

public finance, as well as other ways in which conflict may impact the motives of key actors.

They did not specifically evaluate the effectiveness of various international interventions, nor how

to prioritize expenditure. Gupta et al. (May 2004) analyzed the types of fiscal advice provided by

one institution (the IMF) to post-conflict countries and concluded that additional research is need

to ascertain the track record of countries in implementing these recommendations and what progress


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has been made toward more permanent improvements in the operations of fiscal institutions.

Finally, Collier (forthcoming), in contrast to research by Addison and Ndikumana, argues that taxes

should be kept low in post-conflict countries to avoid choking off economic recovery (Collier

forthcoming).

International financial institutions (IFIs) policy in this area is key given their strong intellectual

leadership. In 1998, the Banks Operations Evaluation Department produced a five-volume report

on The World Banks Experience with Post-conflict Reconstruction, analyzing all Bank operations

in El Salvador, Bosnia, and Uganda, and an overview of experiences in Cambodia, Eritrea, Haiti,

Lebanon, Rwanda, and Sri Lanka. This study concluded that if tax effort and the pattern of public

expenditures have a direct bearing on post-conflict reconstruction, as they did in El Salvador, it is

legitimate to include these parameters in the conditionality agenda (Kreimer et al. 1998). However,

it was not until 2003 that the World Bank acknowledged officially that, in post-conflict settings,

the main objective over the short to medium term must be to consolidate peace. (World Bank,

2003) This represents a break with the previously held view that these were political mattersbeyond the Banks purview. After 9/11, the Banks Low-Income Countries Under Stress or LICUS

Initiative began to study how standard approaches to institution-building need to be adapted to fit

low-capacity countries (i.e., identification of zero-generation reforms) and an evaluation of this

initiative will be produced by the World Banks evaluation office in 2006.

The International Monetary Fund (IMF) has also modified some of its normal policies and practices,

but has not introduced institutional changes comparable to those at the World Bank. At the level of

formal policies, the main innovation has been the expansion of the Funds emergency assistance

window to cover specifically post-conflict assistance. In addition, Fund staff members have played

key roles in re-establishing monetary, financial, and fiscal systems in places where they must bebuilt more or less from the ground up, as in Bosnia, East Timor, Kosovo, and Afghanistan. Boyce

(2004) reviews these openings for policy change within the IFIs and makes several

recommendations for more conflict sensitive approaches, several of which relate directly to public

finance (i.e., greater attention to horizontal inequalities, revenue mobilization, rethinking

macroeconomic stabilization, and tackling the legacy of odious debts).

Post-conflict Transitions: The second literature is the literature on post-conflict transitions which

focuses on distinct types of transitions, critical risk factors, and various strategies and elements to

strengthen peace and prevent a relapse into conflict.

The peace literature has emphasized the importance of security (i.e., demobilization, disarmament

and reintegration of combatants, police reform, civilian control of reformed militaries, international

peacekeeping and constabulary forces), justice (i.e., criminal justice systems, transitional justice and

truth commissions, international criminal courts), political reform (i.e., constitutional reform and

elections), and building conflict management capacities throughout society. Within this literature,


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public finance issues have received very little attention and, as a result, there is little awareness

among policymakers of the links between the states ability to manage public resources and its

ability to manage conflict. Woodward argues that no international or local action in support of

peace can occur without a budget or donor to tap and yet economic aspects of peace agreements

tend to take a backseat to security concerns (Woodward 2002). Exceptions include case studies on

El Salvador (Boyce) and also Guatemala where the fiscal pact was closely linked to

implementation of the peace accords (Stanley and Holiday 2002).

CICs research on post-conflict public finance will undertake a series of country case studies

focused explicitly on public finance and its links to building states and building peace. Drawing on

these case studies, it will develop a set of recommendations for improving international assistance in

this area, making an important and unique contribution to knowledge in both the public finance and

post-conflict transition fields.

Line Ministries in Kabul and Provincial Mustofiats ( provincial offices of the Treasury) andthe development of Payroll Systems; (iii) to develop capacity of Treasury Department civilservice staff in the areas of basic skills (English language, basic computer literacy and officeskills); technical skills (public finance management theory and advance informationtechnology); and job-specific skills, including the development of training curriculum. MOF IT

Systems Overview2

1.4 Capacity Development Background

Currently, the majority of key civil service positions are filled and civil service personnel domost of the day-to-day work of the Treasury Department. Although the staffing situation hasimproved, attraction and retention of suitably skilled and qualified staff remains the key


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support such as the re-design of business processes, training of users and guidance and helpdesk operations.

2Control menu is used for Chart of Accounts, system configuration and user management.

Financial reporting includes standard basic reports for users (frontend) and advanced reports,which are produced by custom means (backend). There is no electronic interface betweenFree Balance and other systems at the moment, except SDU database, which reads data fromAFMIS. Treasury has 500 user licenses for existing Free Balance modules at the moment.Users from Line Ministries and Provinces use Terminal servers to access AFMIS.

1.3 Selected Bibliography

Tony Addison, Alemayehu Geda, Philippe Le Billon, and S. Mansoob Murshed, Financial

Reconstruction in Conflict and Post-Conflict Economies, Discussion Paper No. 2001/90.

Tony Addison and Leonce Ndikuman, Overcoming the Fiscal Crisis of the African State, WIDER

Discussion Paper No. 2001/12, June 2001.

Richard M. Bird and M. Casanegra de Jantscher (eds.), Improving Tax Administration in

Developing Countries, Washington, DC, International Monetary Fund, 1992

Richard M. Bird, Jorge Martinez-Vazquez and Bennon Torgler, Societal Institutions and Tax

Effort in Developing Countries, ITP Paper 04011, 2004

James K. Boyce (ed.), Economic Policy for Building Peace: The Lessons of El Salvador, Boulder,

CO: Lynne Reinner, 1996

James K Boyce, Investing in Peace: Aid and Conditionality after Civil Wars. Oxford: Oxford

University Press, 2002

Paul Collier, Post-conflict Economic Recovery, draft chapter submitted to the International PeaceAcademy, November 2004

Bird, R.M. (1978), Assessing Tax Performance in Developing Countries: A Critical Review of the

Literature, in Taxation and Economic Development.

Blejer M.I. and Cheasty A. (1989), Fiscal Implications of Trade Liberalization, in Fiscal Policy in

Open Developing Economies, ed. By Vito Tanzi, IMF.

Chelliah R.J. (1971), Trends in Taxation in Developing Countries, IMF Staff Papers, Vol. 18, No.

2, July, pp. 254-325.

Choudhry, N.N. (1979), Measuring the Elasticity of Tax Revenues: A Divisia Index Approach,

IMF Staff Papers, vol. 26, March 1979.

Linn F.J. and Weitzel D. (1990), Public Finance, Trade and Development: What Have WeLearned? in Fiscal Policy in Open Developing Economies, ed. By Tanzi, pp. 9-28.

Boyce, J. 2003. Fiscal Reconstruction of the State, Symposium on State Reconstruction and

International Engagement in Afghanistan, sponsored by the Centre for Development Research,

University of Bonn, and the Crisis States Programme, Development Research Centre, London

School of Economics, 30 May- 1 June, Bonn.

Carnahan, M. 2007. Options for Revenue Generation in Post-Conflict Environments, Center on

International Cooperation and Political Economy Research Institute.


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Rubin, B. 2006. Afghanistans Uncertain Transition from Turmoil to Normalcy, Council on

Foreign Relations Paper No. 12, March

Chapter # 03

1. MethodologyEach sectors major stages are identified and examined. The key players arerecognized and their roles analysed to better understand the sectors dynamics. Special

attention is paid to market irregularities, barriers to entry, and businessenvironment. Access to finance, distribution networks, and transportation are all

scrutinised to seek out opportunities forleveraging orimprovement.

This initial analysis forms the basis for an overview of the current state of the sector, from

which market trends and shifts can be forecast. This knowledge is crucial tounderstanding how each sectors potential can be optimised. The following analyses are thenperformed to synthesise the findings and form a comprehensive picture of the

sectors and the opportunities theypresent.

1. Ma r k e t S tu d y : For each sector, the market potential is determined by looking at thenational market, and where relevant, the international market. Given the scarcity of

existing data on the Afghan market, interviews and market surveys are used to establish

consumption patterns, estimate market sizes, and identify opportunities. Theregional/international market potential is established primarily through secondary

research.

2. Ma p pi n g of V a lue Ch a in s : Each sector's value chain is defined and described along

with its main components, mainly through interviews with key stakeholders at all levels of

the value chain. Where appropriate, interviews are conducted in a variety of

provinces, to ensure that regional differences across Afghanistan are taken into

consideration. These interviews allow us to understand the main components of each

sector's value chain, the types of players in each component, distribution of value along

the value chain, synergies between different levels, main

drivers of cost and quality in the sectors, international comparisons of cost, and quality


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and variety ofproducts.

3. D e ta il e d S ec tor A n a l y sis a nd S WO T An a l y s is : The detailed sector study and SWOT

analysis synthesize the demand-side (market study) and supply-side (value

chain mapping) studies. Key support activities that may act as either enhancers of

growth or bottlenecks in the value chain are incorporated into the SWOT analysis.4. O v e rvi e w of F in a n c i a l S uppo r t: Access to financial support is addressed in detail.

The aim is to understand what financial support is available to Afghan

entrepreneurs, what variations e x i s t a c r o s s sectors, and how thee x i s t i n g structures can be leveraged or improved. The main issues addressedconcern what financial support exists in Afghanistan, which channels entrepreneurs

and SMEs go to for financing, and if certain sectors or certain types of players aremore affected by the lack of access to finance. This overview is based on a series of

interviews and secondary data.

1.1 Introduction

This section presents the area of study, sampling that sample size, and sampling techniques,

research design, research strategy, data collection methods, data analysis methods and limitation

of the study.

1.1.1 Research design plan:

In development of this research paper we conducted Descriptive type of research in order to

elaborate how is the financial performance and performance of Pashtany bank.

1.1.2 Sample design plan:

As our paper is technical in nature, therefore we took a set of economist which was ranging from

2 to 4 people working as professors in universities or as key positions holders in Pashtun banks

1.2 Data collection Method& Data source plan:

Both primary and secondary collected for this study. The techniques for data col lection method, which are

applicable to the qualitative research process, were therefore use.

Primary data techniques used include:

The archived data of the interview

Self-Completion Questionnaires.

1.3 Data analysis methods:

The study used qualitative methods to analyze the collected data. Tables and figures present the results. The


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researcher combined the information from all sources of information that is interview, Questionnaire , observationand secondary sources.

Moreover, the study integrated the evidence in the study site with the lessons from other studies relating Pashtany bank activities, and its sustainability.

1.4Assumption & Limitation:

It is assumed that that respondents have enough information about the subject matte

(Assumption is based on their professional background).

It is assumed that the asked question from the participant group really address th

subjected issue.( Question are prepared with greater focus and logical linkage)

It is assumed that the gathered data from the various related source are reliable. Due to absence of proper research conducting system in Afghanistan there isnt an

referring source for technical and professional support.

Fewer and probability unverifiable data in Census office.

Shortage of time

1.5 Time scale:

The initial work starts at 1st

September and the final work will be finished at 15th

Mar in the above given time linethe following task will be performed:

1st -15th September : Focus groups interview of (10) participants in two groups and (3) participants

individually.

1st_ 15thSeptember: Checking out the web sites of concerning ministries, study and exploration of

required data from journal official magazines and other related sources.

15th

-25th

September:preliminary data analysis, editing and coding. 25th-7th October: Data cleaning and secondary Analysis.

7th -15th October: Research report writing and review.


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Chapter # 4

4.1 Results and discussion

Enterprise (Afghanistan) BALANCE SHEETAS AT DECEMBER 31, 2010

PROPERTY, PLANT &EQUIPMENT

NOTE 2010

2009USD

USD

FIXED ASSETS - TANGIBLE 4 6,600,0045,307,204

At Cost less: Acc. Depreciation


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CURRENT ASSETS

Stock in trade 5 696,542

Store, Spare and Loose Tools 6 16,175

Trade Receivable 7 486,622

Advances, Deposit and Prepayments 8 214,729Cash and Bank balance 9 8,673

1,422,741

TOTAL ASSETS 8,022,744 6

LESS: CURRENT LIABILITIES

Trade Creditors 10 535,294

Accrued and Other Payable 11 6,287

541,581

NET ASSETS 7,481,163 6

REPRESENTED BY:

Owners' equity 12 7,481,163 6

TOTAL EQUITY 7,481,163 6

Auditors' report is annexed thereto.

The annexed notes form an integral part of thesefinancialstatements.

KA

BULPRESI

DENT

FINANCE

MANAGER


28/47

NOTE 2010 2009

USD USD

Revenue

Sale of Goods 13 24,562,009 19,800,451

Cost of Revenue 14 23,243,923 18,594,356

Gross profit 1,318,086 1,206,095

Operating expenses

Administrative and Selling 15 169,508 157,451

Finance charges 16 - -

169,508 157,451

Operating Profit 1,148,578 1,048,644

Add; other Income 17 - -

Net profit/ (Loss) for the year 1,148,578 1,048,644

- -

Net Profit (Loss) for the Year 1,148,578 1,048,644

Accumulated profit/(loss) brought forward 1,048,644 -

Accumulated profit/(loss) carried forward 2,197,222 1,048,644

The annexed notes form an integral part of these financialstatements.

KAB UL


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PRESI

DENTFINA

NCE

MAN

AGE

R


30/47

2010 2009

USD USD

CAS H F L O W F R O M OP E RA T IN G AC T IVI T I ES

Profit/(loss) before Taxation 1,148,578 1,048,644

Adjustment for:

Depreciation 327,000 355,208

1,475,578 1,403,852

(Increase) in stock/Inventory 89,990 (786,532)

(Increase) in stores and Spare (4,266) (11,909)

(increase) in Receivables 114,486 (601,108)

(increase) in Advances, Deposit and prepayments (82,856) (131,873)

(decrease) in Trade & other payables 43,983 491,311

Increase in others 1,055 5,232

Cash generated (used in) from operations

Tax paid

162,392

-

(1,034,879)

-

CASH INFLOW/(OUT FLOW) FROM OPERATING ACTIVITIES

CAS H F L O W F R O M INV EST IN G AC T IVI T I ES

1,637,970 368,973

Purchase of fixed assets (1,619,800) (5,662,412)

CASH OUT FLOW FROM INVESTING ACTIVITIES

CAS H F L O W F R O M F INANCIN G AC T IVI T I ES

(1,619,800) (5,662,412)

Capital introduced

Drawings

-

(15,641)

-

(7,652)

CASH IN FLOW FROM FINANCING ACTIVITIES (15,641) 5,299,581

NET INCREASE IN CASH AND CASH EQUIVALENTS 2,530 6,142

CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEA 6,142 -

CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 8,673 6,142

KABUL PRESIDENT FINANCE MANAGER


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4.2 Status and nature of business

M/s Surat Zada group is registered with the Afghanistan Investment Support Agency under

registeration number D - 31355. The company is engaged in the business of Trading of Mobile

Cards,Sims, Wheat, Marble, flour manufacturing and other General Trading.

4.3 Basis of preparation

4.3.1 Stement of compliance

These financial statements have been prepared in accordance with International Financial

Reporting Standards (IFRSs) as applicable in Afghanistan.

4.3.2

4.3.3

B

a

si

s of

Meas

ureme

nt

these financial statemnts have been prepared under the historical cost,

except monetary assets and liabilities in currancy other than reporting

currency which are stated as per accounting policy of foreign currency

transactions.

Use of estimates

and Judgements

The preparation of financial statements in cdonformity with

approved accounting standards require managements to make

judgtements, estimates and assumptions that affect the application of

policies and reported amounts of assets and liabilities, income and

expense. the estimates and associated assumptions are based on

historical experiance and various other factors that are believed to be

reasonable under the circumstances, the result of which from the

basis of making the judgements about carrying value of assets andliabilites that are readily not apparent from other sources.

4.4 Summaries of significant accounting policies

4.4.1 Basis of measurement and accountingconvention

These financial statements have been prepared under thehistorical cost convention.


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The preparation of financial statements in confirmity with approved

accounting standards require management to make judgements,

estimates and assumptions that effect the application of policies

and reported amounts of assets and liabilities, income and

expenses. The estimates and associated assumptions are based onhistorical experience and various other factors that are believed to be

reasonable under the circumstances, the result of which form the

basis of making the judgements about carrying value of assets and

liabilities that are readily not apparent from other sources. Actual

result may differ


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4.4.2 Property, plant and equipment

These are stated at cost less accumulated depreciation and impairment losses, if any,

except land which has been stated at cost. Cost comprises acquisition and other directlyattributable costs. The asset is capitalized on the basis of probability of future economic

benefit and the reliability of the cost. Some fixed assets has been purchased by the owners

of the Company but has been recognized in the accounts because economic benefits is

being utilized by the Company in the present and probably in the future by considerng the

intention of the owners.

Depreciation is provided on reducing balance method and charged to profit & loss account

to write off the depreciable amount of each asset over the useful life at the rates specified

in the note 4. Depreciation is calculated on the annual basis. Full year depreciation is

charged in the year of acquisition and no depreciation is charged in the year of disposal.Maintenance and normal repairs are charged to income as and when incurred; major

renewals and improvements are capitalized. Gains or losses on disposal or retirement offixed assets, if any are taken to the profit and loss account for the year.The Company reviews the useful life and residual value of property, plant & equipment on

regular basis. Any change in estimate in future years might effect the carrying value of

thasset alongwith the depreciation value.

4.4.3 Impairment

The carrying amounts of assets are reviewed at each balance sheet date for impairment,

whenever events or changes in circumstances indicate that the carrying amounts of the

assets may not be recoverable. If such indication exists, and where the carrying value

exceeds the estimated recoverable amount, assets are written down to their recoverableamount. The resulting impairment loss is taken to the profit and loss account.

4.4.4 Trade debts

Receivables are measured at original invoice amount less an estimate made for doubtful

receivable, if any, based on review of all outstanding amounts at the year end. Bad debts

are written off when identified.

4.4.5 Trade and other payables

Liabilities for trade and other amounts payable are measured at cost which is the fair value

of the consideration to be paid in future for goods and services received.

4.4.6 Transactions in other currencies

Transactions in currencies other than the reporting currency (US Dollar) are accounted for

at the exchange rates prevailing on the date of transactions. All monetary assets and

liabilities denominated in currencies other than the reporting currency at the year end are

translated at exchange rates prevailing on balance sheet date. Non monetary items that are

measured in terms of historical cost in a foreign currency are translated using the

exchange rate at the date of transaction, if any. Exchange differences are included in the


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4.4 6 Revenue recognition

Sales revenue are recognised when goods are sold and the significant risks and rewardsregarding ownership are transferred to the customer. Revenue from sales is measured at

fair value of the consideration received or receivable, net of returns and trade discounts, if

any.

4.4.7 Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and at banks. Cash equivalents are

highly liquid investments that are readily convertible to known amounts of cash and which

are subject to insignificant risk of changes in value.

4.4.8 Financial instruments

Financial assets and liabilities are classified and stated at values determined according to

substance of contractual arrangements. Financial instruments include receivables, cash

and bank balances, creditors and other liabilities. The particular recognition methods

adopted are disclosed in the individual policy statements associated with each item.

4.4.9 Loans and Borrowings

Loans and borrowings are initially recognized at the proceeds received, subsequent to initial

recognition, these are stated at amortized cost.

4.410 Borrowing cost

Mark up, interest and other charges on borrowing are recognized as an expense in the period in

which it is incurred.


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4.5 ENTERPRICE IN AFGHANISTAN

NOTES TO THE ACCOUNTS

FOR THE PERIOD ENDED DECEMBER 31, 2010

4. PROPERTY, PLANT &

EQUIPMENT C O S T D E P R E C I A T IO N

W . D. V.

As at As at Rate As atFor the

Adjust

As at As at

PARTICULARS 01-Jan-

09

Add

Dell

31-Dec-10 % 01-Jan-09

Period

ment 31-Dec-10 31-Dec-10

.

..USD

Land 540,000 1,355,200 - 1,895,200 - - - -1,895,200

Building 2,024,600 264,600 - 2,289,200 2 40,492 44,974 - 85,466

2,203,734

Plant and Machinery 3,025,000 - - 3,025,000 10 302,500 272,250 - 574,7502,450,250

Vehicles 45,600 - - 45,600 15 6,840 5,814 - 12,65432,946

Furniture and fixture 15,670 - - 15,670 10 1,567 1,410 - 2,97712,693

Computer and equipments 11,542 - - 11,542 33 3,809 2,552 - 6,3615,181


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USD 2010 5,662,412 1,619,800 - 7,282,212 - 355,208 327,000 - 682,208

6,600,004

USD 2009 - 5,662,412 - 5,662,412 - - 355,208 - 355,208

5,307,204

2010 2009

4.1 Apportionment of depreciation expense USD USD

Depreciation charged to cost of sales 261,600 284,166

Depreciation charged to general and administrative expenses 65,400 71,042

Total 327,000 355,208


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4. PROPERTY, PLANT &EQUIPMENT

Fixed Assets Schedule attached atend.

NOTE 2010

2009

USD

USD

5. STOCK IN TRADE

Stock in Trade 5.1 696,542786,532

696,542

5.1 Stock in Trade

Closing Stock- Flour Mil 5.1.1 204,497Closing Stock- Marble Factory 5.1.2 104,481

Closing Stock- Mobile Cards and Sims 303,979

Closing Stock- Other Goods 83,585696,542

5.1.1 Closing Stock- Flour Mil

Finished goods - Flour 132,923

Raw Material - Wheat 71,574

204,497

5.1.2 Closing Stock- Marble Factory

Finished goods - Marbel Tiles etc 67,913Raw Material - Marbel 36,568

104,481

6. STORE, SPARE AND LOOSE TOOLS

Store, Spare and equipment 15,609

Stationary Items 56616,175

7. TRADE RECEIVABLE

Trade receivables 470,992

Other Receivable 15,630486,622

8. ADVANCES, DEPOSITS AND PREPAYMENTS

Advance to Parties - Director (for purchase) 208,481

Advance to employees 5,680

Advance for exp. 568214,729

9. CASH AND CASH EQUIVALENTS

Cash in hand 9.1 8,664

Cash at bank - NBP 98,673


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9.1 Cashin hand

NOTE 2010

2009

USD

USD

Cash in hand Afs 3,5661,561

Cash in hand USD 5,0984,563

8,664 6,124

10. TRADE CREDITORS

Trade Creditors 500,762445,621

Other Payable 34,532

45,690535,294 491,311

11 ACCRUED AND OTHER PAYABLES

Audit fee 700700

Salaries and wages 3,1342,972

Other accrued 2,4531,560

12 OWNER EQUITY

Schedule attachedat the end:

13. REVENUE

6,287

5,232

Sale of Goods 13.1 24,562,00919,800,451

13.1 Saleof Goods

24,562,009

19,800,451

Sale of Goods - Wheat/Flour 6,015,1173,954,329

Sale of Goods - Mobile Cards and Sims 15,915,15011,789,000

Sale of Goods - Marbel etc 1,228,1001,782,041

Sale of Goods - Others 1,403,642


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2,275,081

24,562,009 19,800,451

14. COST OF REVENUE

Cost of Sale 14.1 23,243,92318,594,356

14.1

Cost of

Sale

23,243,923

18,594,356

Opening Stock 786,532

Purchases 14.1 22,172,452 1

Direct Cost 14.2 719,881

Depreciation 4.1 261,600

23,940,465 1

Less: Closing Stock 696,542

23,243,923 1


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14.1Purchas

es

NOTE 2010

2009

USD

USD

Purchase of Goods - Wheat/Flour 4,812,0943,558,896

Purchase of Goods - Mobile Cards and Sims 15,198,96811,258,495

Purchase of Goods - Marbel etc 1,105,2901,603,837

Purchase of Goods - Others 1,056,1001,240,774

22,172,452 17,662,00214.2 Direct Cost

Salaries and wages 525,513

1,047,345

Transportation 107,982215,208

Other Direct Cost 86,386

172,166

719,881 1,434,720

15. GENERAL AND ADMINISTRATIVE EXPENSES

Salaries, wages & benefits 39,10135,671

Repair and maintenance 12,48711,892

Internet 18,00012,000

Communication 1,2141,156

Traveling exp. 4,7594,532

Food Exp. 6,0505,762

Entertainment 2,2172,111

Staff welfare exp. 2,6252,500

Stationery exp. 2,4132,298

Mic. Exp. 14,5437,787


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Mark - up / Interestbearing

Non mark - up /Non interest bearing

TotalMaturity

Within One year

one year to 5 year

Maturity

Within one One year

year to 5 yearUSD USD USD

18. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES

18.1

FINANCIAL

ASSETS

AND

LIABILITIES

2010

Financial assetsStock in trade - - 696,542 -696,542

Store, Spare and Loose Tools - - 16,175 -16,175

Trade Receivable - - 486,622 -486,622

Advances, Deposit and Prepayments - - 214,729 -214,729

Cash and Bank balance - - 8,673 -8,673

- - 1,422,741 -

1,422,741

Financial liabilities

Trade and other payables - - 541,581 -541,581

- - 541,581 -

541,581

Net financial assets /

(Liabilities)

2010

- - 881,160 -

881,160

OFF BALANCE SHEET ITEMS

CONTINGENCIES 2010 - - -- - COMMITMENTS

2010 - - -- -

Effective interest rates for the monetary financial assets and liabilities are

mentioned in the respective notes to the financial statements.


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4.6 RISK MANAGEMENT

4.6.1 Liquidity Risk

Prudent liquidity risk management Implies sufficient cash andmarketable securities, the availability of funding to adequate amount of

committed credit facilities and the ability to close out the market position due

to dynamic nature of the business. The company follows an effective cash

management and planning policy to ensure availability of funds and to

take appropriate measures for new requirements.

4.6.2 Concentration of credit risk

The management monitors and limits the company's exposure to credit risk

through monitoring of client's credit exposure. The company's credit risk is

primarily attributable to its contract receivables and its balances at banks.

The credit risk on liquid funds is limited because the counter parties are bank

with reasonably high credit ratings.


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4.6.3 foreign exchange risk

foreign currency risk arises mainly where receivable and payables exist due to

transaction in foreign currencies. As the company's reporting currency USD is itself a

foreign currency in Afghanistan, so its risk is restricted to the bank balances, trade debts

and payables and all other transactions in the local currency and foreign currency (other

than the reporting currency USD)

4.6.4 Interest rate risk

Interest rate risk arises from the possibility that changes in interest / mark up rates will

affect the value of financial instruments. In respect of interest / mark up bearing financial

assets and liabilities, the respective notes indicate their effective interest / mark up ratesat the balance sheet date tand the periods in which they re-priece or mature. The

management regularly monitors inter

Analysis of Income Tax in Afghanistan

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