Tashkent, Uzbekistan (UzDaily.com) -- One of the main factors hindering economic development is the shadow economy. In its content, the shadow economy is the result of the deliberate evasion of taxes by the country’s citizens, and therefore the weakening of the social and economic policy pursued by the state. Thus, the shadow economy has such a negative impact on society and the state as a disruption of the competitive environment, a decrease in the quality and quantity of products, a reduction in tax revenues to the state budget, as well as a slowdown in economic growth.

To more clearly show the negative impact of the shadow economy, imagine a common table for 10 people, where high-quality table setting costs 100 thousand soums for each participant. But at the same time, only 5 out of 10 people give money. In this case, the table will be set for 500 thousand soums, but the quality and quantity of food on the table will be lower than expected. It turns out that refusing to pay for half of the group leads to receiving low-quality products, which, naturally, is perceived negatively by those who paid.

A similar situation occurs with taxes: if some citizens refuse to pay taxes and continue to receive services from the state, then those who constantly pay taxes will suffer from this and the overall quality of services will be lower than it should be. Therefore, paying taxes is not a right, but a duty of a citizen of the state. Reducing the shadow economy is impossible to imagine without the voluntary agreement of citizens to come out of the shadows and pay taxes.

In Uzbekistan today, the share of the shadow economy, according to various estimates, varies from 40% to 60%. Thus, according to the Agency for Strategic Development, in 2022 the share of the shadow economy in various sectors of the country’s economy ranged from 48% to 62%. At the same time, in October 2023, UzliDep announced that the share of the shadow economy in Uzbekistan is 40%. At the same time, the main drivers of the development of the shadow economy in the country were such areas as the secondary market for housing and vehicles, informal trade, provision of services and others.

It is also worth noting that in 2022 the economically active population in Uzbekistan was almost 15 million people. Of these, about 9 million were employed in the informal sector. According to IMRI calculations, provided that wages in the informal sector are equal to the formal one, the state budget lost 32.9 trillion soums in tax revenue in 2022.

In order to reduce the level of the shadow economy, a number of measures have been taken in the country aimed at simplifying the conditions for doing business and intensifying the use of digital solutions.

The measures taken included reducing the property tax rate for legal entities from 5% in 2017 to 1.5% in 2022, as well as reducing the existing types of taxes from 13 to 9 and tax audits from 13 to 3.

As a result of the ongoing reforms, the entrepreneurial activity of the population has increased - the number of registered business entities has grown from 229.6 thousand in 2017 to 555.9 thousand in 2022 - an increase of 2.4 times.

Creating conditions for the development of e-commerce as a driver for stimulating market participants to officially register as an entrepreneur made it possible to increase the share of this sector in GDP from 0.004% in 2017 to 1.2% in 2022.

As a result of the measures taken, Uzbekistan improved its position in the Heritage Foundation’s Index of Economic Freedom, in particular in the “tax burden” subindex, the index increased from 90.7 in 2017 to 92.8 in 2023 (a higher indicator is better ), and in the “fiscal health” subindex – from 99.8 to 85.3 (a lower indicator is better).

It is worth noting that paying taxes is useful not only for the state, but also for the citizens themselves. This situation arises for several reasons:

Taxes fund a variety of public programs and services, such as education, health care, social security, safety, and infrastructure. Taxes also help keep the cost of socially important services low by subsidizing some areas of the economy. For example, the cost of training on a paid contract basis in all areas of study in state higher educational institutions of Uzbekistan has not changed in the 2023/2024 academic year. Against the backdrop of increasing spending on education, maintaining the cost of contracts means an increase in state budget expenditures.

Paying taxes also funds infrastructure projects, research, innovation, and other activities that promote economic growth. This creates jobs, improves the business climate and contributes to the development of the economy as a whole.

Taxes fund law enforcement, the military, and other institutions that provide security and protection to citizens. They help maintain order, prevent crime and protect the rights and freedoms of citizens.

Taxes fund social programs such as pensions, unemployment benefits and assistance to the poor. This helps provide social protection and support for those who are more vulnerable.

In general, paying taxes is a necessary component of government functioning and provides many benefits to citizens in the form of access to public goods, equitable distribution of income, economic growth, protection of rights and security, and social support.

In order to further reduce the share of the shadow sector in the economy of Uzbekistan, it is necessary to take the following measures:

1. One of the incentives for the population and business to voluntarily pay taxes is to provide a transparent environment in which people will be confident that their contributions are used wisely and the tax system is fair and equitable:

- it is necessary to clearly inform the population about how tax revenues are used to finance public services, infrastructure, social programs and the development of local communities;

- create online tools or platforms that allow citizens to interact with the budget, study the distribution of funds and the impact of various budget decisions, and regularly receive detailed reports on government spending;

- conducting educational campaigns aimed at informing the population about the importance of taxes, their contribution to the well-being of society and the consequences of tax evasion.

2. Another area is public education campaigns, which play a vital role in attracting people and businesses to understand the importance of paying taxes in the well-being of society. This requires developing clear, understandable and accessible messages that explain the benefits of taxes to support public services, infrastructure and social programs. It is useful to provide specific examples of government services and projects financed by tax revenues (schools, hospitals, roads and other public facilities).

Positive effects can be achieved through the use of various communication channels, including social networks, television, radio, newspapers and public events to reach different segments of the population.

3. Reducing the number of illegal trade transactions, in particular in the field of purchase and sale of cars and real estate by notary offices:

- checking the integration of the automated unified information system “Notary” with the current taxpayer database and the availability of a declaration of the total annual income of the seller and recipient in the process of drawing up contracts;

- in the event of a discrepancy between income and tax payments, it is mandatory to require the tax inspectorate to submit a declaration of total annual income (certificate of compliance with tax legislation);

- application of a tax amnesty to taxpayers in case of identification of overdue and unpaid taxes (possibility of paying taxes at a preferential rate and in installments for 6 months).