The customs reform must be fully implemented.

This article has been prepared as part of the public discussion on the project of the Budget Message on the main directions of tax policy for 2025−2027.

Customs Reform: What Has Been Accomplished

A large-scale liberalization of foreign economic activity, which began in 2017, has also affected the area of customs regulation. In particular:

— Extensive work has been carried out in customs administration aimed at reducing administrative barriers to export and import, which I have detailed in the article “Customs Reform: What Has Been Done and What Still Needs to Be Done.”

— There has been a significant reduction in customs payment amounts.

The weighted average rate of accrued customs payments (customs duties, excises on imports, and VAT paid upon crossing the border) decreased almost twofold during the first four years of the reforms from 2017 to 2021: from 49.8% to 25.3% — see Figure 1.

Figure 1. Weighted Average Rates of Accrued and Actually Paid Customs Payments.

Source: Data from the Customs Committee of Uzbekistan

At the same time, the rate of actually paid customs payments (accrued payments - what must be paid according to the regulatory framework, actually paid payments - what has been actually paid into the budget) has been increasing since 2019, and since 2021 has exceeded the 2016 figure. This is due to the cancellation or reduction of exemptions for customs payments. This process began in 2019 as part of the tax reform. If in 2018 the gap between accrued and actually paid customs payments was 5.3 times (!), by 2021 it had reduced to 1.9 times.

A key consequence of the reduction in customs payment rates has been a significant legalization of imports, which in turn has expanded the taxable base, meaning that the budget has benefited substantially from the reduction in customs payment rates. For instance, in 2016, revenue to the state budget of the Republic of Uzbekistan from customs payments, including VAT, amounted to 5.6 trillion sums, while in 2020 it reached 24.8 trillion sums, and in the first half of 2021, it was 16.3 trillion sums. In the planned budget for 2024, customs duties alone are expected to generate state revenue of 14.8 trillion sums.

Why do I believe that a significant portion of the increase in imports after 2017 is due to the legalization of previous smuggling and gray imports? The exceedingly high customs payment rates combined with an incredible volume of exemptions (out of every 5.3 sums that should have gone to the budget in 2018, only 1 sum was received) inevitably led to:

— Destruction of competition (suppliers of imported goods operate under unequal conditions — some have exemptions while others do not) and the opportunity for selected importers to gain monopolistic-corrupt rents;

— Huge incentives for smuggling and corruption at customs (those without exemptions are likely forced to smuggle imports, paying “tribute” to customs officials and other bureaucrats, otherwise they simply cannot compete with those who bring in goods under exemptions);

— Incredible incentives for corruption in the provision of all these exemptions.

Accordingly, as soon as the rates were lowered and the scale of exemptions reduced, the incentives and opportunities for smuggling significantly diminished.

There is also statistical evidence of the legalization of imports. Until 2017, the volumes of official imports were either less than or equal to the volumes of exports — see Figure 2.

Figure 2. Volumes of Imports and Exports of Goods and Services of Uzbekistan, in billion USD.

Source: https://www.stat.uz/ru/ofitsialnaya-statistika/merchandise-trade.

However, in the current historical context, Uzbekistan's imports cannot help but exceed exports significantly, as the country has two other important sources of foreign currency inflow: remittances from labor migrants and foreign loans and investments. The outflow of currency predominantly occurs through imports.

Thus, the difference between the sum of “foreign currency inflows from exports + remittances from labor migrants + inflow of foreign loans and investments” and the figure for official imports approximately reflects the size of illegal imports. Until 2018, this figure was quite significant. The rapid growth of imports compared to exports observed since 2018 indicates a substantial reduction in smuggling and gray imports. This is also a result of the significant reduction of customs payments.

In summary, customs reform has made a considerable contribution to the liberalization of foreign economic activity, and consequently, to the economic growth of our country. However, it has not yet reached its logical conclusion, particularly regarding the levels and principles of calculating customs duties. Let's discuss this in more detail.

High Customs Duty Rates on Specific Categories of Goods

Despite the significant reduction in customs burdens on imports that has previously occurred, unfortunately, high customs duty rates on specific categories of goods still remain: duties of 20% or more are set for 261 items, including a wide range of consumer goods, such as food products, clothing, footwear, household appliances, and vehicles.

This high level of customs payments:

— Destroys the competitive environment in the relevant sectors of Uzbekistan's economy, creating artificial monopolies and depriving local producers of incentives to improve the competitiveness of their goods, passing the costs of inefficient enterprises onto consumers;

— Is an important factor contributing to the high prices of imported consumer and production goods, leading to rising costs for both consumers and producers;

— Stimulates smuggling, gray imports, shadow turnover, and the growth of counterfeit products in the markets, which adversely affects both honest importers and producers, as well as budget revenues.

The issues of high customs payment rates, the unification of excise taxes on imports and local goods will largely be resolved during negotiations for Uzbekistan's accession to the WTO. However, this means that the process is prolonged. Meanwhile, an expedited resolution of these issues is necessary not only for WTO accession but also for enhancing the efficiency of the national economy. Therefore, it is highly desirable to accelerate the reduction of customs payments for those categories of goods where they are inflated.

For example, a 30% duty for the code TN VED 2106 “Food products not elsewhere specified or included,” which includes special and therapeutic nutrition (very important, for example, for children and adults suffering from allergic diseases), food additives and ingredients (widely used in the food industry). Moreover, in the overwhelming majority of cases, such a high duty rate does not serve to protect local producers due to their absence. Instead, socially vulnerable families suffer, forced to buy therapeutic nutrition at inflated prices, as well as local food producers, for whom the high cost of food additives and ingredients increases the production costs of their products.

High duties on certain types of raw materials and components seem completely illogical and harmful, especially from the perspective of the notorious approach of “protecting domestic producers.” For instance, high customs duties on imported raw materials and components for furniture include:

— Boards, plywood from wood, pressed wood (codes TN VED 4410-13) – 10%;

— Fasteners and fittings for furniture (3926300000) – 10%;

— Mattresses and other furniture items (9404) – 10%, with combined rates proposed for most items (not less than $0.30 to $1.5 per kg), which generally significantly increase the effective duty rate;

— Parts of furniture (9403) – also a combined rate: 15%, but at least $0.40 per kg.

Customs duties are also excessively inflated for certain types of business tools and equipment, even compared to the rates of the Unified Customs Tariff of the Eurasian Economic Union — see Table 1.

Table 1. Customs Duty Rates for Certain Types of Tools and Equipment in Uzbekistan and in EAEU Countries.