Afghanistan Analysts Network – English

Economy, Development, Environment

How much do I need to pay? Changes to Afghanistan’s Tax Law cause chaos and confusion

Chantal Grut 18 min

What are the tax obligations of citizens, residents and investors in Afghanistan? This question is much harder to answer today than it was 18 months ago. Then, the 2009 Income Tax Law, a remarkably well-written and detailed piece of legislation, had gone a long way in establishing a path towards clarity, stability and integrity for taxpayers and officials alike. Indeed, it was one area, where ‘rule of law’ in Afghanistan seemed to be starting to take hold. From late 2015, however, new tax laws were passed and they have created uncertainty and chaos. AAN guest author Chantal Grut* describes the confusion and how it has created more space for corruption, predation and tax evasion.

Confusion over what tax individuals, businesses and non-profits should be paying has, at times, overwhelmed Afghanistan’s tax offices and tax payers. (Photo: Tolo)Confusion over what tax individuals, businesses and non-profits should be paying has, at times, overwhelmed Afghanistan’s tax offices and tax payers. (Photo: Tolo)

In early 2016, the always-bustling Kabul city tax offices saw waiting times grow from hours to days. Taxpayers had been informed of a new penalty for failing to file either a tax return or, in the words of the new 2015 Tax Administration Law, “any other document” with fines threatened regardless of whether any tax was due or not. As a result, tax offices were flooded with people filing piles of various empty forms in an attempt to prevent the mysterious new penalty from being directed at them. Tensions ran high as taxpayers were charged penalties for a still-undefined obligation that they never knew they had. The confusion and increased waiting times carried on long after an April 2016 memo from the Ministry of Finance’s Legal Services and Revenue Policy Directorate confirmed that late penalties should not be applied to at least some of the documents. The memo, which came in response to an influx of petitions, requested tax offices to “adjust their performance in accordance with the tax laws to prevent taxpayers from aimlessly wandering around.” (1)

While the Afghan tax system has always faced many challenges, the legislation at its heart – the 2009 Income Tax Law (2), now partially repealed – is still one of the best-written and most detailed pieces of legislation on the books in Afghanistan. This remains the case, to the extent that it is still in force. The clarity, stability and integrity of this legislative regime created a space in which tax officials and taxpayers, over six years, worked together to establish a truly Afghan tax jurisprudence. This was indeed a remarkable, rare example of organic and effective rule of law development.

However, over the last 18 months this legislative framework has been subject to significant and rapid change. These changes included the introduction of a Value Added Tax Law and the Tax Administration Law, which repealed large swaths of the Income Tax Law while leaving other parts still in force. Putting aside for the moment the substance of the changes, the manner in which they have been introduced – vaguely, apparently haphazardly and without sufficient preparation or adequate notice – runs the risk not only of damaging the long-term health of the tax system, but of crushing nascent rule of law in one small corner where it had been thriving. Further overhauls are expected in the near future, with the Ministry of Finance currently in the process of repealing and replacing the last remaining articles of the 2009 Income Tax Law.

Afghan tax law – the basics

Before delving into the details of the new laws and how they were brought about, it is useful to lay out the basic tax obligations of individuals and organisations.

The most common income tax obligations (3) for both for-profit and non-profit entities in Afghanistan are:

  • A monthly obligation to withhold and pay taxes from: employees’ salaries (a progressive scale of 0-20%), landlords’ rental income (0-15%) and payments to contractors (2-7%);
  • A quarterly obligation to file and pay business receipts tax – a flat tax, usually four per cent – on gross revenue (non-profit organisations are exempt from this obligation); (4)
  • An annual obligation to file a detailed tax return and pay 20 per cent tax on annual net profits (non-profit organisations and certain tax-exempt programmes are exempt from the obligation to pay the 20 per cent tax, but not from the obligation to file returns).

While the tax rates themselves are not particularly high, (5) compliance is costly in terms of time and administrative effort. Taxpayers have a 10 to 15 day window at the end of each month to calculate and pay each monthly, quarterly and annual tax obligation and file the applicable forms, after which financial penalties may accrue. (6) The 10 to 15 calendar day window is particularly onerous for smaller taxpayers without administrative staff; and for international investors headquartered outside Afghanistan where offices and banking systems may operate on a different work-week. Filing requires multiple trips to the tax office and the bank each month, as waiting times are long and taxpayers are regularly asked to come back the following day because of power outages or problems with the computer system. The annual return obligation is not completed until a tax clearance certificate is issued by the tax office, a process which typically takes many months (despite the Tax Administration Law specifying a time limit of 21 days) and which does not progress without the regular actual physical appearance of the taxpayer or their representative at the tax office. (7) Despite all these problems, however, at least the procedures were clear.

It is vital for Afghanistan to increase its tax revenues. The current tax base is small, with the group of large taxpayers described as “tiny” and over-taxed (8), and the wider potential taxpayer population described as “largely noncompliant and unidentified” (9). Despite recent impressive increases in revenue collection, domestic revenue still covers only half of the government’s operating expenditures (10). The government is under great pressure to continue to increase revenue in order to decrease reliance on foreign aid, to meet donor and IMF targets, and to fund much-needed development and infrastructure projects. That needs to happen at the same time as the economy continues to suffer from a collapse in economic growth. The government itself has acknowledged the challenges posed by corruption and limited capacity. (11)

There was always a lot of work to be done to develop the procedures, personnel, and most importantly, systems to get more people paying tax. However, under the strong framework of the 2009 Income Tax Law, the trend had been upwards and steady. For every page of the 2009 Law, the Income Tax Manual – a detailed set of regulations and practical examples that makes such a technical law function in practice – provided an additional five to six pages of guidance. Multiple plainly-worded guidelines were published and distributed. The law, moreover, established a dispute resolution procedure and a public and private rulings system to resolve disputes between taxpayers and the tax office and answer unclear questions of law. Rulings were (and still are) issued in writing, and are widely regarded as reasonably fair, with decisions regularly being made in favour of both the government and taxpayers. The body of rulings issued under the 2009 Law – to the extent that they are still in force – help make taxes more reliable and evenly and fairly applied, by ironing out disagreements about how certain rules should be applied.

The body of rulings, practices and procedures was developing into a uniquely Afghan tax jurisprudence that had grown organically from the real-life use of the tax law by both tax officials and taxpayers, garnering buy-in from both, and tailored to the specific conditions of Afghanistan (see for example how this has developed in relation to withholding tax on foreign service providers discussed at footnote 17). In terms of post-2001 legislation and formal rule of law development, the evolution of the tax law is remarkable: this author is anything similar in any other sector.

The new tax laws  

The most significant recent changes in the tax law were the passing of the 2016 Value Added Tax Law and the 2015 Tax Administration Law. The latter left some parts of the 2009 Income Tax Law in force, while repealing much of it. While some of the other recent amendments to the tax laws have been discrete and fairly well-publicised, such as the introduction of a 10 per cent telecoms tariff and the increase of the standard business receipts tax rate (from two to four per cent), others have resulted in more wide-ranging and less transparent overhauls. These changes have not only disrupted a stable, tried and tested system, they were also implemented without consultation or warning and, in effect, retroactively, at times without so much as making a copy of the law available.

The Tax Administration Law for example, published in the official Gazette dated 18 November 2015, states that it will come into force after the date of publication. However, neither the Gazette nor a copy of the law were actually physically available until mid-December 2015 (12). Since most people are not in the habit of regularly checking the Gazette, many taxpayers were first notified of the law when they received a penalties bill for failure to comply with it, with penalties back-dated to 18 November 2015. A decree issued almost a year later, in October 2016, recognised that “companies were not aware” of the Tax Administration Law but, nonetheless, continued to allow for the penalty to be applied back to November 2015 for all but one category of form (the fourth quarter 1395/2016 business receipts tax submission that was due on 5 January 2017 (see here).

The first public information sessions on the Tax Administration Law which the author is aware of were not organised until late November 2016, more than 12 months after the law had come into effect, and even today, no public guidelines or published procedures such as exist for the 2009 Law have been made available.

In contrast, the Value Added Tax Law, dated 13 April 2016, stated that it did not come into effect until more than eight months after its publication, on 21 December 2016. This is an excellent model for legislation that helps mitigate the risk of a law being retrospectively applied because of publishing delays. It also provided taxpayers and citizens with time to become familiar with the new rules. Despite this, in practice however, there were still months of confusion over whether or not the law even existed. In May 2016, tax officials responding to queries about Value Added Tax stated that there would not be a new law or system for many years to come. In early July 2016, the official Gazette became available and included the Value Added Tax Law with the 13 April date. That meant that the law had actually been passed before the public was told there were no plans for any such law, and also three months before a copy of the law would be made available to them.

This confusion is made immeasurably worse by the fact that, in contrast to the 2009 Tax Law, the new tax laws have not been clearly drafted. They have also not been released with any of the supplementary rules and regulations that are necessary for a technical law to function.

To take just one example, Article 35(1) of the 2015 Tax Administration Law provides a daily late filing fee for failure to submit a tax return “or any other document,” words that did not appear in the 2009 version. When the 2015 Tax Administration Law repealed this section (and many other sections) in the 2009 Law, by default, it also repealed the underlying regulations and rulings issued under those sections, but did not replace them. In total, approximately 60 pages of guidance and detail in the Tax Manual were deleted, not including other rulings and guidelines. It was this provision that led to the queues of people filing reams of documents, many of no consequence or relevance to actual tax liability, in early 2016: who were they to know what “any other document” referred to?

Whether or not one agrees with the expansion of the Article 35(1) fee from a failure to file a return to a more general failure to file undefined paperwork, (13) the vagueness with which the regulation was drafted created a waste of government and private resources. It lost the government goodwill and created a sense of injustice among taxpayers who were not able to assess with any certainty what the law was asking of them. The change in the law, moreover, left low-level tax officials with an overbroad discretion to interpret the law. That created new space for corruption and predation, but also placed a heavy burden on those tax officials who were trying their best to do an already difficult job with limited resources. All of this could have been avoided by simply specifying what “documents” were being referred to, either in the text itself or in an accompanying regulation.

At the time of writing, a Tax Administration Manual that provides some guidance (including on the meaning of ‘documents’) has reportedly been drafted, but is not yet publicly available.

Regulations and guidelines were not the only items left unprepared when the laws were passed. Much of what the Tax Administration Law purported to establish, and the mechanisms which are required for it to function, have not actually been created. For instance, Article 55 describes new dispute resolution procedures for a Board that does not, at the time of writing, exist. New licences that must be held by tax accountants pursuant to Article 33 have not yet been issued, nor have the rules explaining the licensing procedures. Responsibilities assigned to the tax administration (Art 59), such as the requirement to issue a tax clearance certificate within 21 days of a taxpayer request, are not being implemented in practice and would be near impossible to implement without radical changes to the way that the tax clearance procedure currently works.

While financial penalties for late filing of documents are enforced in practice, a system to date-stamp documents when submitted, to prove that filing obligations have been complied with, is missing. In practice, the tax office may refuse to provide any proof of filing, or refuse to accept a filing, creating a situation where taxpayers are powerless to stop the daily accrual of financial penalties (14).

In another bizarre example, the Value Added Tax Law came into effect on 21 December 2016, without any corresponding Value Added Tax system being created and, apparently, without any intention to implement or enforce the law. It was, however, the law of Afghanistan (together with the numerous penalties for failure to comply with it (15)), at least until 29 January 2017, when yet another law was passed delaying the effective date by four more years. Once again and despite the 29 January 2017 date stated on the law, the text of the law is still not available online or in print at the time of writing. Only a soft copy was made available by the Ministry of Justice on request almost a month after it had been passed, on 20 February 2017.

This lack of legislative coherence is not uncommon in Afghanistan. However, it is in stark contrast to the 2009 Tax Law, and highlights one of the reasons why the 2009 Tax Law was (and to the extent it is still in force, is) such a workable law. (16) The forms, procedures and administrative bodies that were established by the 2009 Tax Law largely existed and functioned. The rights and responsibilities that the law set out were capable of being enforced, and were not just policy statements or aspirations. Passing laws that are treated as nothing more than paper and that may or not be implemented, possibly only at a later date, makes it close to impossible for anyone to truly know what their tax obligations are, or what their tax obligations might be interpreted to be (with penalties and interest) in the future.

Such laws also make it extremely difficult for taxpayers and tax officials to hold each other to account according to the law, something which, albeit imperfectly, and among a small group of participants, had previously been happening. It is difficult for tax officials to point to articles of the law and insist that taxpayers are legally required to part with a percentage of their profits, or for taxpayers to point to specific articles and insist on their due process, when large swathes of the law are not really in force, or have not been implemented yet, or are only aspirational. If law is no longer in the toolbox available to both officials and taxpayers, what is left is confusion in which predation and coercion on the one hand, and manipulation and evasion on the other, are likely to thrive.

AAN put in a request to the Ministry of Finance for an interview as we were keen to know why they felt the need to change the taxation law and why those changes had resulted in such muddle and confusion. However, the ministry was unable to provide us with an interviewee.

The future of paying taxes in Afghanistan

What are the tax obligations of citizens, residents and investors in Afghanistan? It is a question that is much harder to answer today than it was 18 months ago. It is inexplicable that so much uncertainty and opaqueness could have been introduced to this sector, at exactly the time that the government is trying to expand the tax base in a shrinking economy, attract investment, and tackle corruption, and hoping to develop and maintain a strong revenue stream.

Indications are that the situation may be about to become even worse: the Ministry of Finance is in the process of repealing and replacing the remaining articles of the 2009 Income Tax Law, and is soon to send the new draft legislation to the cabinet. Early drafts indicated that certain provisions may exacerbate areas of uncertainty in Afghanistan’s tax code even further (17). Meanwhile, a recent draft of another proposed law (18), to license professionals entitled to work in the tax sector, gives the Ministry of Finance (as opposed to an independent body) the authority to license the professionals who are charged with holding it to account. If passed in its current form, Afghan attorneys – independently licensed by the Afghanistan Independent Bar Association – would likely be excluded from appearing on behalf of taxpayers at the Ministry of Finance, including on questions of law.

At times, legislative change is, of course, needed. If a law needs to be changed to pursue new policy goals, then lawmakers need to consider which specific aspects need amendment without overhauling precious functional systems. If laws are to be partially repealed and replaced, they should be republished in one document that shows clearly what is and is not still in force. Laws should be drafted with clarity and precision, and should preferably not be passed until the regulations, policies and administrative structures needed to make them work (and an intention to actually implement them) have been prepared. At a minimum, citizens should be provided with adequate notice of changes and access to the laws before being penalised for failure to comply with them.

The 2009 Tax Law and its accompanying regulations were, and still are, a strong example of a law that was clearly drafted, accessible, and enforceable. When considering rule of law development, taxation may not be the first thing that springs to mind, but in Afghanistan, it was the primary area where formal rule of law was developing. Moreover, it was developing not through a top-down initiative, or a donor-funded rule of law project, but organically, through day-to-day interactions between tax officials and taxpayers who chose to conduct their affairs and resolve their disputes by opening up a law book together, seeing what it says, and conducting themselves accordingly. It is a real pity that such hard won achievements have been undermined.


* Chantal Grut is a legal consultant based in Kabul. She holds degrees from Columbia Law School and Victoria University of Wellington and is a licensed attorney in New York State and a New Zealand Barrister & Solicitor.




(1) Letter to Mustofiat, RSI-94618, 1395/1/28.

(2) The Income Tax Law 2009 was preceded by and substantially based on the Income Tax Law 2005.

(3) Matters relating to customs and import duties are dealt with under a separate legislative regime. Additional tax obligations that are not as common include the obligation to withhold from certain forms of passive income (Income Tax Law 2009, Article 46).

(4) Alternative business receipts tax rates range from two to ten per cent for certain specified industries. See: Income Tax Law 2009, Article 66 (as amended by Presidential Decrees nos. 58 and 149).

(5) Afghanistan’s corporate income tax rate is 20%, and the progressive personal income tax rate also peaks at 20%. According to international rates for 2016 as published by KPMG, this compares to a global average corporate tax rate of 23.62% (and an Asia average of 21.92%), and a global average personal tax rate of 33.17% (and an Asia average of 28.88%). See: KPMG Individual income tax rates table, available here; and KPMG Corporate tax rates table, available here.

Other Afghan tax obligations including on gross revenues and expenses, as opposed to net profits, can however be quite onerous particularly for low-margin businesses.

(6) These financial penalties include:

  • A flat 10% penalty for late payment of withholding taxes: Tax Administration Law, Article 36(1);
  • A 0.1% per day penalty for late payment of any tax liability: Tax Administration Law, Article 34;
  • A per day penalty of 30 AFN per day (for natural persons) or 100 AFN per day (for legal persons) for failure to file “documents” including for example a withholding tax or business receipts tax form: Tax Administration Law, Article 35(1).

(7) Delays in the issuance of tax clearances on the part of the tax office can have serious repercussions for businesses, as business license renewal is contingent on obtaining a tax clearance certificate for the most recently closed financial year. This is particularly onerous for businesses whose licenses expire close to the end of a tax year. For example, annual returns for the year ending 20 December 2016 are not due to be submitted until 20 March 2017, and once submitted typically take multiple months before a tax clearance is issued. As such if a business license expired in January 2017, then it is almost certain to be subject to a long period of expiration before it will be renewed, even if the business in question pursues its tax filings and clearance with the most diligent efforts. The lack of a valid business license can also lead to an inability to renew work visas, making it incredibly difficult for some organisations to continue to operate on a legal basis.

The Central Business Registry has alleviated some of this burden by issuing licenses which are valid for three years (as opposed to the former one year license), in effect providing two years of relief from the time crunch.

(8) See for example: Letter of Intent from Government of Afghanistan to the International Monetary Fund, Attachment I, Memorandum of Economic and Financial Policies for 2016-2019, paras 21 (specifically in relation to a lack of capacity to administer a Value-Added Tax), 36-37. Available here.

(9) William A. Byrd and M. Khalid Payenda, “Afghanistan’s Revenue Turnaround in 2015”, United States Institute of Peace, Brief 201, February 2016. Available here.

See also: Masuda Sultan, Saving Private Enterprise in Afghanistan, New York Times, 2 January 2017. Available here.

(10) International Monetary Fund, IMF Country Report No. 16/252, “The Islamic Republic of Afghanistan: Request for a three-year arrangement under the extended credit facility – press release; staff report; and statement by the Executive Director for the Islamic Republic of Afghanistan”, July 2016, p 11. Available here.

(11) See page 11, footnote 13 of the just mentioned IMF country report.

(12) This is a common problem. The Tax Administration Law (Art 65(1)), like many laws in many jurisdictions, states that it will come into effect after the date it is published in the official Gazette. Such provisions are intended to ensure that laws cannot come into force before the public has access to them. However, due to printing and translation delays, the ‘publication date’ printed on Afghan Gazettes is usually not the date that it is actually physically published or available to the public, in hard or soft copy. It typically becomes available at a date weeks or even months later, with the effect that all laws stated to come into force on Gazette publication are actually retroactive.

(13) There is certainly scope to argue that additional taxes for late filing/payment have become wildly disproportionate under the Tax Administration Law. For example, a tax liability of 1 AFN per month in salary withholding alone, a total annual bill of 12 AFN, accumulates to 202,300 AFN in late filing penalties per year for legal persons, or 1.7 million per cent of the tax liability itself. This is in addition to two other proportionate penalties of a flat 10% (1 AFN) and 0.1% per day (2 AFN annualized). The alternative to accruing over 202,000 AFN in penalties on a 12 AFN tax bill is to hire an employee or service provider to complete the forms and file them in person with the bank and the tax office every month, a cost that is also disproportionate to 12 AFN.

This penalty applies equally to non-profit organisations and businesses that may be operating at a loss.

(14) For example, if a tax liability is disputed or a taxpayer does not have the means to pay a tax bill, they will not be able to stop the filing penalty from accruing, because the tax office will typically not accept filing of the document unless the underlying tax liability is paid. Other practical problems may result in the tax office refusing to accept filing of a document, including confusion about which tax office the taxpayer is supposed to register with, and system-outages at the tax office.

(15) Tax Administration Law 2015, Article 43.

(16) In many respects, the 2009 Income Tax Law is the outlier. For example, at the time of writing and as far as the author is aware, the dispute resolution body purportedly established under Article 37 of the NGO Law does not exist. The Labour Law 2008 makes multiple references to a “pension” (see Articles 26, 134, 141, 143, 144), including a “right” to a pension and payment from an employer “fund”, without ever specifying what the pension obligation, if any, actually is, or who it would apply to. While these any many other articles of the Labour Law allude to often laudable policy goals, the result is a law that cannot be objectively complied with or enforced, because the rights and obligations it purports to establish are so often vague, with details left to be fleshed out in regulations that may or may not have been promulgated.

(17) Early drafts of the new proposed tax law indicated that officials were considering trying to radically alter the tax landscape by limiting the ability of non-profits to generate tax-exempt charitable income and by placing high tariffs on a range of international costs. That, of course, may have changed in subsequent drafts, but it is worth noting that these changes would have exacerbated, rather than clarified, existing uncertainties in the 2009 Income Tax Law, and undone the hard work that has been done to address those uncertainties through jurisprudence.

One area of confusion under the 2009 Income Tax Law relates to the obligation to withhold seven per cent taxes from contractors and service providers who do not have an Afghan business license, and whether or to what extent it applies to foreign vendors. Because this is a tax that might be levied on certain costs, uncertainty about what costs it applies to is high-risk – if a taxpayer is not aware that the tax will apply at the time that it makes the purchase from the vendor, then the taxpayer is unable to properly budget (if the cost is seven per cent higher the taxpayer may have declined to make the purchase). If the tax is later found to apply, the taxpayer will be out of pocket not only for the seven per cent, but for the significant penalties for failure to withhold discussed above.

This is one of the areas in which the rulings committee has provided significant guidance, finding that, with the exception of certain specific industries such as insurance (see: Decision #12.2, 1393/4/9), there is no applicable tax where the service provider is outside of Afghanistan, and the services are provided outside of Afghanistan and made available to an Afghan taxpayer (see: Decision #15, 1392/5/9). In practice, the risk is also mitigated by Income Tax Manual Article 72.4 which states that the withholding obligation only applies to vendors who are paid more than 500,000 AFN in the course of the financial year – meaning that taxpayers can more easily identify costs more or less likely to be subjected to the withholding obligation.

In contrast, the new draft Income Tax Law proposes a withholding tax of 20 per cent on foreign “technical services fees”, and excises the 500,000 AFN per year exemption threshold. “Technical services fees” is defined as “any type of payments for any kind of administrative, technical or consultancy services” which does not provide much more clarity. It could, conceivably, apply to almost every cost that a business or non-profit incurs to any service provider who is not registered in Afghanistan including software, email, web-hosting and cloud service providers; administrative service costs incurred by Afghan taxpayers while travelling internationally; international banking fees; advertising in international forums; and international dispute resolution costs to name just a few.

Because a service provider who is not actually otherwise subject to Afghan jurisdiction is not likely to agree to a 20 per cent cut on their invoice, in reality this is a cost that Afghan taxpayers would have to bear to gain access to international markets, services, and expertise.

Further because the tax could apply to almost any cost, because it is so high, and because the penalty regime is so punitive, taxpayers will have no good choices if the provision as drafted becomes law. They can either voluntarily gross-up all their international service costs and pay the tax to prevent the risk of penalties accruing (with the result that they pay 25 per cent more than their competitors in the informal and international markets), they can decline to purchase any international services where possible, or they can run the potentially devastating risk of the tax being found later to apply to their expenses, with penalties.

(18) See also: Tax Administration Law 2015, Article 33.






Development Economy Finance Law