Entrepreneurs dissatisfied: are the “useful barriers” in the tax system really working? (video)

Under the law, an entrepreneur should not be able to issue an electronic invoice, or sales document, for goods that have not been recorded in their warehouse as received or purchased. In practice, however, “cash-out” firms — sham business entities that exist on paper but do not actually operate — are selling non-existent goods on paper, while honest entrepreneurs who purchase products from such firms later bear the consequences. This was stated during an open dialogue attended by representatives of the Chamber of Commerce and Industry, the Business Ombudsman, the Tax Committee, as well as tax consultants, auditors, and accountants.

At the meeting held yesterday, April 6, participants sharply discussed the digital control system introduced in Uzbekistan’s tax system to monitor the circulation of goods and prevent fraudulent paperwork. In particular, doubts were raised over how effectively the system prohibiting the sale of goods not present in a warehouse is functioning in practice.

Entrepreneurs expressed dissatisfaction that the State Tax Committee is failing to carry out some of its assigned duties. Under Cabinet of Ministers Resolution No. 595 of September 22, 2021, “On Measures to Improve the Administration of Value Added Tax and Tax Administration in Transactions with Foreign Legal Entities,” the Tax Committee was assigned the following responsibilities:

1. the “risk analysis” system when issuing VAT certificates;
2. liability for “tax gaps”;
3. the “suspicious” criteria that are triggering criminal cases; and
4. the obligation of state bodies to verify a taxpayer’s good faith.

According to lawyer Shokir Boqiyev, gaps in the system have led to criminal cases being opened against hundreds of companies since 2021.

“If the tax system had technically blocked the issuance of sales documents for goods that are not in the warehouse, so many entrepreneurs would not be suffering today,” a representative of the business community said.

Responding to these objections, State Tax Committee representative Ravshan Imomov said that the system does include a verification mechanism based on product and service identification codes and that it is functioning. However, this restriction currently applies only to companies engaged in the sale of finished goods, namely wholesale trade businesses.

“This rule works only for trading companies, because whatever a trader buys is what they sell, and the product code does not change. But such a restriction cannot be imposed on a manufacturer. A manufacturer buys raw materials and sells a completely different finished product under a different code. If we were to prohibit a manufacturer from selling on the grounds that there is no finished product in its warehouse, production across the country would come to a halt,” the committee official explained.

Lawyer Shokir Boqiyev questioned that explanation.

“You say the system is working in wholesale trade. Then how is it that I have hundreds of criminal cases in my hands involving ‘cash-out’ companies engaged in wholesale trade in 2023 and 2024 that sold goods they did not have in stock? If the system is working, how did they manage to issue those invoices?” he said.

The response from the State Tax Committee representative sounded more like an admission.

“It is possible that they are passing through our validation checks. We cannot restrict everything because the processor would struggle. Give us the list, and we will examine it,” the committee employee said.

One of the entrepreneurs who took part in the discussion, Fakhriddin Ilyosov, approached the issue even more sharply.

“Since the date that law came into force in 2023, have you been fulfilling the duties you were supposed to perform? Is not the very question we are asking — whether the system works or does not work — itself the wrong question? Fine, forget all that. Answer my question: since the day the law entered into force in 2023, does every single product sold through an invoice have a receipt record or not? It does, right? And if someone says it does not, then that is absurd, right? In that case, an invoice is not something that should require litigation or proof of something, is it?” the entrepreneur said.

The State Tax Committee representative was unable to provide clear answers to these questions. However, in the end, the parties agreed to jointly review the existing problematic situations and criminal cases. Entrepreneurs are demanding that the tax authorities ensure the system operates with genuine transparency and leaves no room for fraudsters.