Kabul Municipality; Fresh Fruits and Vegetable Market Levies

Background

 

On 22 August 2017, as the minutes of meeting no. 8 item 9, the High Economic Council (HEC) issued an order (Mosawabe) exempting (zero tax) “raw materials for industrial use and domestic agriculture products” from municipal taxes (as referenced in the Cabinet Justice Committee meeting on 15 August 2018. Annex 1).  In a letter (No. 2738) dated 25 October 2017, referencing a letter (No. CS0687, dated 28 August 2017) from the HEC Secretariate (Annex 2), Kabul Municipality (sharwali) acknowledged HEC’s Mosawabe and communicated accordingly to the Department of Market Regulation. However, on 15 August 2018, it stated its opposition to the Mosawabe (Annex 3) citing Article 11 of the Municipalities Law, which stipulates that any person (or entity) who uses the land owned by the municipality for economic activities must pay a levy.[1] As a result, the issue was discussed in the Cabinet Justice Committee meeting on 15 August 2018, chaired by the Second Vice President, Sarwar Danish (Annex 1).

The Committee noted that while the intent of HEC’s decision was in line with the government’s policy is to support the private sector and facilitate domestic commerce, it was not possible to implement the Mosawabe as it contravened the law.

 

Issue

 

On September 10, 2020, in letter no. 530 (see Annex 4) the Afghanistan Chamber of Commerce and Investment (ACCI) forwarded a request from the Union of Fresh Fruits and Vegetables of Kabul City (See Annex 5) to the Office of the First Vice President (OFVP). The letter, citing the above-mentioned HEC decision, requested that the Kabul Municipality (KM) continue its practice of exempting the fresh fruits and vegetables sold for domestic use from KM Tahjaee [levies].[2]

 

The OFVP asked PriSEC to take the lead in coordinating efforts to support the private sector in resolving this issue.

 

 

Efforts towards Resolution of the Issue

 

The PriSEC team dedicated significant resources to investigate this issue to understand the background, ascertain the matters at hand and identify solutions. These included several meetings with ACCI, KM and Union of Fresh Fruits and Vegetables Traders and obtaining and reviewing copies of related documents, including decision and decrees. PriSEC experts analyzed the issue in terms of investment facilitation and the legal perspective. After an exhaustive examination, the PriSEC team discovered that this issue was not one with a sector wide impact, rather it related to a dispute between one prominent market trader of melons and Kabul Municipality.

 

Based on the documents reviewed and discussions over several meetings, PriSEC learned that in March 2017, KM entered into a contract valued at 92 million Afs with the Abdul Qadir Ghazniwal Group Logistics Services Company for melon and watermelon concession at the municipal fruit and vegetable market. The company paid the levy for five months. After which, it ceased payment citing the HEC Mosawabe as the basis for an exemption. The matter was referred to the Supreme Audit Office (SAO) for review. According to this review, HEC’s exemption order contravened Article 490 of the Civil Procedures Law, which bars non-judicial bodies from taking decisions concerning the public interest. Based on the SAO’s ruling and the 15 August 2018 decision of the Cabinet Justice Committee to invalidate the High Economic Council’s Mosawabe, the Ghazniwal Group was ordered to pay KM the sum of 60 million Afs representing seven months of levies and 12 percent penalties (Annex 1).

 

The PriSEC legal expert submitted a report to the FVPO outlining its finding and recommendations, including a review of the legal framework which was prepared by Working Group 5 at the request of the First Vice President (Annex 6).

 

 

Current Status

 

Abdul Qadir Ghazniwal Group Logistics Services Company disputes the Cabinet Justice Committee’s decision and the SAO order and is litigating the issue through the commercial court.

 

The municipality, for its part, has selected another vendor through a competitive tendering process and is currently carrying out due diligence before issuing a contract (Annex 7).

 

 

Assessment/Analysis

 

While on the face of it, this issue only relates to the experience of a single trader and has not impacted the fresh fruits and vegetables sector at large, it does point to deeper issues that are worth examining and addressing.

 

For the most part, Municipalities are self-financing entities that raise revenues from local sources to conduct operations and provide services to their constituencies. Kabul municipality is no exception to this and relies heavily on revenue collection, including rental income and levies, to meet its operational budget. Afghanistan’s Municipalities Law allows KM to raise revenues, including collecting rents and levies from those who use municipal properties for commerce. In the case of fresh fruits and vegetables, this levy is set at 300 Afs per ton.  The municipality’s properties are held in public trust and must be used for the public’s benefits. However, PriSEC’s review of this matter found numerous instances where the public interest and the political will to support the public sector as an important contributor to the national economy overlapped.

 

Furthermore, there is an apparent lack of coordination between the various decision-making bodies, judicial forums and other government entities with jurisdiction over issues related to the private sector, municipalities and revenue collection. This is exacerbated by a lack of clarity concerning rules and procedures as they relate to this issue. This issue highlights a need for a comprehensive review of Afghanistan’s legal instruments (laws, regulations and procedures, and decrees) to harmonize and clarify ambiguities.

 

In this case, at least, the High Economic Council’s decision was sufficiently vague to be open to misinterpretation and possible misuse. As stated above, it was also contradictory to legal provisions allowing municipalities to collect rents and levies and outside its jurisdiction as HEC is not a judicial body. The decision to generally exempt domestic agricultural goods from municipal levies, but these products amount to hundreds of items divided into three categories: 1- before planting 2- planting 3- after planting. While this dispute is only between KM and a melon trader, there is no information available on the impact of HEC’s decision on other agricultural products.

 

This issue is currently being litigated in commercial court. Once a ruling is issued, the matter will be settled as decision are binding. However, seeking recourse in the court system is time-consuming and expensive. While an arbitration system is in place, arbitrators are reluctant to consider disputes between the government and the private sector.

 

 

Recommendations

 

To address this issue, PriSEC proposes the following recommendations:

 

Review and harmonize the relevant decrees and other high official decisions – This case revealed several areas where the various legal instruments overlapped and/or contradicted each other. PriSEC Working Group 5 should secure resources to review relevant laws and other legal instruments and make recommendations on harmonizing them. In the alternative, an appropriate state institution should be tasked with carrying out this review.

 

Clarify remits and jurisdictions – This was the case of one government entity taking a well-intentioned decision without sufficient consultation with relevant stakeholders. In addition, there appear to be several government entities with overlapping mandates and jurisdictions. Steps should be taken to support government entities to clarify their roles and remits regarding private sector development, including measures for sufficient consultation in advance of decisions. This should include guidelines that help interpret the law and Standard Operating Procedures.

 

Raise awareness – The lack of clarity concerning the law both on the part of the private sector and among government bodies should be addressed through awareness-raising activities. PriSEC should consider working with the Kabul municipality to make information material available in simple language. In addition, KM should be encouraged to implement a public awareness-raising campaign to inform the public about the purpose and benefits of local revenue collection.

 

Consider mandatory private sector arbitration –There is an arbitration system in place to resolve commercial disputes but is it often overlooked in favor of the formal judicial system. There is anecdotal evidence that this results from reluctance on part of arbitrators to consider cases involving disputes between the government and the private sector. There is good experience in other countries in using members of the bar as pro tem judges in arbitration venues. PriSEC should consider conducting a review of best practices and proposing a possible way forward to motivate commercial entities to utilize the commercial dispute resolution center for similar complaints as the first recourse before approaching the FVPO.

 

Consider what you elevate – Perhaps the most perplexing part of this assessment is understanding why a case involving a single largescale trader was referred to the FVPO. While an answer continues to elude the review team, it is important to take lessons from this experience. In this light, ACCI and other private sector actors should be encouraged to conduct due diligence to ascertain the facts of an issue as well as its scale and impact. This would allow the FVPO and PriSEC to make the best use of the limited resources available to support a resolution for issues that will have a more significant impact and, therefore, a greater benefit to the private sector.

 

 

Potential impact

 

Agriculture is the largest sector of Afghanistan’s economy, accounting for about a quarter of the GDP and making significant contributions to growth, job creation, food security and revenue collection. According to the World Bank Report Revitalizing Agriculture for Economic Growth, Job Creation and Food Security, in 2011/12, the sector “employs about 40 percent of [Afghanistan’s] total workforce ….

 

The number of full-time equivalent (FTE) jobs in agriculture is estimated at 2.5 – 2.7 million, or 3.2 – 3.4 million when the jobs created through linkages from agriculture to the rest of the economy.”[3] The government has prioritized this important sector in the National Development Program for Private Sector Development (NPP PSD), and the market-building pillar of the Afghanistan Peace and Development Framework II (ANPDF II), including supporting agriculture actors in increasing and growing their share in the domestic market. This support is essential as producers and traders in the agriculture sector operate on low-profit margins and are susceptible to shocks related to a lack of national infrastructure and competition from imported, and less expensive, produce from neighboring countries.

 

However, creating an enabling environment to support private sector development cannot be seen as an end to itself. This support must be viewed through the lens of an ultimate benefit to the Afghan people by leveraging the revenues collected from a strong and growing private sector to deliver valued services to citizens.

 

To this end, a recognition of the symbiosis between public resources and public sector development is required. As has been highlighted by this issue, policies and actions in this regard must balance the public’s interest against those of the private sector.

 

The government should take steps to ensure that decisions are clearly understood by the private sector and that they are in the service of enable agriculture actors to pursue domestic markets as a destination for their products. The private sector, for its part, should understand its responsibilities to the public and make good it’s contractual obligations to local governments as representatives of the people.

 

Annex 1

[1] https://idlg.gov.af/laws/

[2] Its High Economics Council decision: Meeting no: 8, date: 1396.5.30, page: 3, paragraph 9.

[3] http://documents1.worldbank.org/curated/en/245541467973233146/pdf/AUS9779-REVISED-WP-PUBLIC-Box391431B-Final-Afghanistan-ASR-web-October-31-2014.pdf

Annex 2

Annex 3

Annex 4

Annex 5

Annex 6

Annex 7

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