Table of Contents

CHAPTER # 01 .................................................................................3 1.INTRODUCTION .............................................................................3

1.1 Who must pay Business Receipts Tax? .............................................................4 1.2 Treatment of BRT for income tax purposes........................................................4 1.3 Tax Rates & Application....................................................................................4 1.4 Gross Receipts Subject to 5% Business Receipts Tax..........................................5 1.5 Services defined...............................................................................................5 1.6 When is BRT Paid?............................................................................................6 1.7 The Tax Form and Calculation of Tax.................................................................6 1.8 What if a business doesnt have income during the quarter?..............................7 1.9 Enforcement Provisions....................................................................................8 2.0 Where to find information?...............................................................................8

2.OBJECTIVES OF STUDY ..................................................................9 2.1 REGISTRATION AND TAX EXEMPTIONS IN AFGHANISTAN...............9

2.1.1 February 9, 2010 ..........................................................................................9 2.2 Taxes.............................................................................................................10

2.3 LIMITATION .............................................................................13

2.3.1 Soag tax exemption provision......................................................................14 2.3.2 Section B.4. Taxation...................................................................................14

CHAPTER # 2..................................................................................14
1.Literature view .................................................................................................15

CHAPTER # 03................................................................................23 1.METHODOLOGY ..........................................................................23

1.1 Introduction ..................................................................................................24 1.2 Data collection Method& Data source plan:......................................................24 1.3 Data analysis methods: ..................................................................................24 1.4Assumption & Limitation:.................................................................................25 1.5 Time scale:.....................................................................................................25

CHAPTER # 4 .................................................................................26
4.1 Results and discussion ...................................................................................26 4.2 Status and nature of business...........................................................................4 4.3 Basis of preparation.........................................................................................4 4.4 Summaries of significant accounting policies.....................................................4 4.5 ENTERPRICE IN AFGHANISTAN .......................................................................8 MANAGEMENT.......................................................................................14

4.6 RISK

CHAPTER # 05 ...............................................................................16 CONCLUSION AND RECOMMENDATIONS...........................................16

5.1. Discussion ....................................................................................................16 5.1 .Conclusion ...................................................................................................16 5.1.1 Tax Laws....................................................................................................17 5.1.2 Tax Exemptions ..........................................................................................17 5.2 Recommendation ...........................................................................................18 5.3 Reference ......................................................................................................18

Chapter # 01
1. Introduction
Commerce and trade have been the lifeblood of Afghanistan since the nation was born in the eighteenth century. Afghanistan sits at the crossroads of major trade routes that link Asia and Europe and have shaped the course of world history. The fabled Silk Road passed directly through Afghanistan and was the chosen route for caravans bringing goods from China, India, and the Arabian Peninsula. As Afghanistan emerges from three decades of violent conflict, commerce and trade are once again the keys to its future. Economic development will help bring stability, peace, and prosperity to Afghanistan. But economic growth does not occur in vacuumit is closely linked to the establishment of the rule of law. A clear and effective framework of laws and independent tribunals facilitates commerce and encourages economic growth. Commercial laws and institutions, in particular, are crucial for sustained economic development because they regulate commercial transactions. Commercial law and institutions empower commercial actors and enable them to expand, compete, resolve disputes, access markets, and trade with relative ease. Good commercial law enables landowners to tap into their propertys value, facilitates access to capital, streamlines procedures for registering a company, and ensures the enforcement of contracts and debt. Good institutions are also crucial because illogical and inefficient bureaucracies, unreasonable administrative costs, and widespread corruption undermine commercial law. Broad-based economic development requires institutions and individuals, such as the courts, judges, registries, lawyers, the private sector, and non-governmental organizations (NGOs). Thesis will explore the linkages between commercial law and economic development in both theory and practice. It begins with a brief overview of Afghanistans economy, including major macroeconomic indicators. Next, it analyzes the business environment in Afghanistan. It then provides an overview of Islamic commercial law, which has shaped commerce in Afghanistan for centuries. The second part of the Chapter focuses on the empirical connections between rule of law and economic growth. This section will explore the role of commercial law and institutions in a countrys economic development.

1.1 Who must pay Business Receipts Tax?

A legal person (corporation, limited liability company, partnership, etc.) must file a quarterly return and pay tax for the quarter. A natural person having gross receipts of AFN 750,000 or more per quarter must file a quarterly return and pay tax for the quarter. However, a natural person who owns a hotel, restaurant, or guesthouse, and whose quarterly gross receipts are less than AFN 750,000, still must file a quarterly return and pay tax for the quarter.

1.2 Treatment of BRT for income tax purposes

BRT paid is considered to be an ordinary and necessary expense of doing business and is therefore deductible from gross income when computing taxable income for the year.

1.3 Tax Rates & Application

There are three rates for Business Receipts Tax: two percent, five percent, or 10 percent with rates applied on gross receipts based on business type as specified in the Income Tax Law 2009. Gross Receipts Subject to 2% Business Receipts Tax All gross receipts are subject to two percent with the following exceptions: Hotel services Restaurant services Telecommunications services Airline services Halls and clubs services as related to events

The income of a hotel, restaurant, or guesthouse with gross receipts less than AFN 750,000 per quarter is subject to two percent BRT. The gross value of imports (including any customs duties paid) is subject to two percent BRT. The two percent BRT paid on imports will be allowed as an advance payment for business receipt tax payable. If the amount paid at the time of import is more than the business receipt tax for that year the excess amount is not allowed as credit in the subsequent year.

1.4 Gross Receipts Subject to 5% Business Receipts Tax

Gross receipts from halls and clubs where events are held (such as wedding halls). Gross receipts from restaurants, hotels, and guesthouses with gross receipts of AFN 750,000 or more per quarter Gross Receipts Subject to 10% Business Receipts Tax Gross receipts of restaurants and hotels considered luxury hotels and restaurants. Gross receipts or income for telecommunication and airline services regardless of whether the taxpayer has passed the tax onto the customer

1.5 Services defined

A legal person (corporation, Limited Liability Company, partnership, etc.) or a natural person operating as a sole proprietor providing a service as defined in categories listed below must file a return and pay tax on a quarterly basis. Hotel services means the provision of sleeping accommodation and related services, including the provision of meals, beverages, laundry and communications services, to persons who occupy such accommodation as transient guests. Restaurant services means the provision of food or beverages by an establishment that provides facilities for immediate consumption at that establishment, or catering services of prepared food; or sales of cooked foods that were prepared on the premises. Telecommunication services means the provision of any kind of telephone, internet, or fax service. Airline services means passenger air services where the flight originates in Afghanistan. 1.5.1 How might these rates vary for a single business? Applicable BRT rates can vary based on the business activity generating income as documented by relevant gross receipts. Example 1: Kabul Nights Restaurant, a legal person, is a fine dining restaurant taxed at 10 percent on its restaurant services. The restaurant also sells traditional handicrafts, which are taxed at a 2

percent rate.

1.5.2 How might these rates vary for by quarter? Example 2: Ahmad, who is a sole proprietor, recently opened a restaurant in Kabul. Monthly gross sales of the restaurant for the first three months (Mizan, Aqrab and Qaus) were AFN 274,000. Since sales for the quarter were less than AFN 750,000, the business (although a sole proprietor) will have a business receipts liability at two percent of gross receipts for the quarter, or AFN 5480. Example 3: Ahmads restaurant has become well known and business has increased significantly. His gross receipts for Hamal, Saor, and Jowza were AFN 970,000, which exceeds the AFN 750,000 threshold. Therefore, Ahmad must pay BRT for the quarter at 5 percent, or AFN 48,500,

1.6 When is BRT Paid?

Tax forms and payments are due on a quarterly basis using the solar calendar. Tax payments should be made in afghani at Da Afghanistan Bank no later than the 15th day following the end of the solar quarter in which the sales were made. Quarter Saratan Saratan Sunbala Jeddi Jeddi Hut Due Date Hamal Jowza 15 Mizan Mizan Qaus 15 Hamal 15 15

Example 4: During the 3rd quarter (Mizan-Qaus) of the solar year, ABC Company received AFN 200,000 in commissions and AFN 100,000 from the sales of products. ABC Company has calculated its tax due on the receipts from commissions and from sales of products as AFN 6,000 [AFN 200,000 + AFN 100,000) x 2%]. ABC Company would file this return and pay the amount due at Da Afghanistan Bank no later than 15 Jeddi. Example 5: From Example 3 above, Ahmad has calculated his tax due on the AFN 970,000 for Hamal, Saor, and Jowza as AFN 48,500. Since the return and tax are due on a quarterly basis, he would complete his form and file this return and pay the tax at Da Afghanistan Bank no later than 15 Saratan.

1.7 The Tax Form and Calculation of Tax

The four part BRT form requires name, address, taxpayer identification number (TIN), business type, gross receipts for each type of BRT, total tax for each type of BRT and total tax payable. One copy is filed with the cashier at Da Afghanistan Bank when the tax is paid. The bank will send two copies of the form to the Ministry of Finance. Taxpayers retain a fourth copy for their

records.

If BRT has been withheld and paid during the quarter, for example, BRT withheld from payments for fulfilling government contracts, it needs to be included in the calculation of tax on the BRT form. Example 6: From Example 1 above, Kabul Nights Restaurant has receipts from restaurant services (food, beverages, etc.) subject to 10 percent BRT and receipts from sales of handicrafts subject to two percent BRT. During the second quarter of 1389 Kabul Nights had gross receipts from sales of handicrafts of AFN 320,000 for the quarter. Kabul Nights paid AFN 2,000 BRT on some items it imported for its business in the first week of the quarter. It also had gross receipts from restaurant services of AFN 1,050,000 for the same three months. Kabul Nights would report this income by 15 Mizan 1389 as follows: Quarterly Tax Period From Saratan To Sunbala

2% Business Receipts Tax Line 11 - Gross receipts of goods and services Line 14 - Total for Quarter Line 15 - Quarterly Tax (multiply by 2%) 320,000 6,400 320,000

10% Business Receipts Tax Line 20 Gross receipts of luxury or premium hotels and restaurants 1,050,00 Line 22 - Total for Quarter 1,050,00 Line 23 - Monthly Tax (multiply by 105,00 Line 24 - Total Tax Due For Quarter 111,40 Line 25 - Total BRT paid during 2,00 Line 26 - Total Payment Due 109,40 0

1.8 What if a business doesnt have income during the quarter?

If a business meets the tests for the BRT categories discussed in this guide, but has no receipts for the quarter, the taxpayer must still file a return with a statement attached explaining that the business had no gross receipts during the quarter. Remember that BRT is applied to gross receipts and not net profits. If the claim is accepted, the

business will not be subject to BRT for the quarter. If, however, the claim is found to be false, the business will incur additional tax as a penalty (under Articles 100 and 104 of the Income Tax Law) in addition to the tax owed. 1.8.1 Income exempt from Business Receipts Tax Income received from Interest Export of goods and services Rent or lease of residential property to a natural person providing that the tenant uses the property for residential purposes for more than six months of the tax year Sale of the property by a natural person outside of the ordinary course of the natural persons business. A sale is considered to be outside the course of the natural persons business when such sales are not regular and continuous.
a)

Fees earned from the exchange of currency, operation of savings or other bank accounts, transaction from deposits or withdrawals, issuance of checks and guarantee letters, internet banking, provision of mortgages or loans, provision of lines of credit
b) c)

Issuance of cash-settled contracts pending a specific date in the future Future contracts settled by physical delivery Premiums for the provision of insurance or re-insurance

d)
e) f)

Distributions received by a shareholder from a corporation, limited liability company or partnership with respect to the shareholders stocks or partnership interest g) Salary or wages

1.9 Enforcement Provisions

Failure to comply with the requirements of the Income Tax Law may result in the Ministry of Finance using administrative powers within the tax law to ensure compliance.

2.0 Where to find information?

Afghanistan Revenue Department tax offices and Mustufiats provide forms, instructions, and guides to taxpayers free of charge, available both as printed and as downloadable versions from a new website http://www. ard.gov.af. The website also provides locations, contact numbers and hours of operation for Afghanistan Revenue Department tax offices and Mustufiats. Taxpayers also can download other useful information including various public announcements and rulings, questions & answers regarding wage withholding tax, the Income Tax La 2009, and an Income Tax Manual. The manual discusses separately each article of the law, along with relevant regulations, often with helpful examples.

2. Objectives of study
2.1 Registration and tax exemptions in Afghanistan 2.1.1 February 9, 2010
The purpose of this information sheet is to provide guidance to partners on how to register to legally operate in Afghanistan and to provide guidance on applicable tax exemptions. The information provided in this document should not substitute for each implementing partner seeking its own registration and tax advice. USAID expects each of its implementing partners to fully comply with the laws of the Islamic Republic of Afghanistan (IRoA) Questions related to USAID tax exemptions and problems encountered with registration and the payment of taxes where exemptions apply should be brought to USAIDs attention immediately

2.1.2 REGISTERING AS AN NGO

The Afghanistan NGO Law was enacted on June 7, 2005, for the purpose of regulating the activities of domestic and foreign NGOs in Afghanistan. It p r o v i d e s the t e r m s of establishment, registration, administration, activity, internal supervision, dissolution and liquidation of property of domestic and foreign NGOs. The law may be found in the Official Gazette No. 857/2005.

2.1.3 What is an NGO under the laws of Afghanistan?

An NGO is a domestic or foreign nongovernmental, nonpolitical and notforprofit organization.1 A foreign NGO is established outside of Afghanistan according to the laws of a foreign government.

2.1.4 How to Register an NGO in Afghanistan?

NGOs are registered by the NGO Department within the IRoA Ministry of Economy (MoE), which is responsible for both registering and supervising NGOs. There are two key laws that govern the establishment, registration and operations of civil society organizations: the Law on Social Organizations enacted November 2002 and the Law on NonGovernmental Organizations enacted June 2005

Reference 1 Article 5.1.2.3.4.5 Afghanistan NGO Law 2 Articles 11, 18 & 27 Afghanistan NGO

For NGOs receiving USAID funds, the entity must first proceed to the Ministry of Foreign Affairs 3 (MoFA) with a letter from USAID introducing the organization as a USAIDfunded organization to the MoFA for registration. The MoFA then sends the information to the MoE to register the 4 entity as an NGO. According to the Afghanistan NGO Law , an NGO must submit a semiannual activity report and an annual activity report to the MoE. Failure to submit the reports could result in the dissolution of the NGO. The semiannual report should be prepared in one original and three copies for submission to the central and regional offices of the MoE. In addition, an NGO must provide its annual financial statements/reports, prepared in accordance with international auditing standards, to the MoE.

2.1.5 How to register For Profit Entities?

In order for a forprofit entity to register and begin work in Afghanistan, it must first register with the Afghanistan Investment Support Agency (AISA). AISA issues licenses for investors in manufacturing, health services, construction and the service sector such as consulting and security services. There are several forprofit entities (not NGOs) which are USAID partners/contractors implementing USAID funded programs in Afghanistan. These entities are registered at AISA as consulting/advisory services organizations implementing foreign donor assistance programs. To register, the forprofit entity must first proceed to the MoFA with a letter from USAID 5 introducing the organization as a USAIDfunded organization to the MoFA for licensing at AISA. The MoFA then sends the information to AISA to license the entity as a forprofit entity. The implementing partner collects and completes the AISA forms and submits them to the licensing department of AISA. AISA then sends a letter to the Ministry of Finance (MoF) requesting information on whether the organization is exempt from taxes in accordance with our bilateral agreement with the GIRoA. Once the AISA forms are completed, information on the organization is also sent to the Central Business Registry (CBR) for registration. The CBR is a one stop shop to register businesses combining all of the functions previously done by the Commercial Court, the Ministry of Justice (MoJ) and the MoF. The CBR facilities the registration process for all businesses. The CBR issues 6 the partner a Tax Identification Number (TIN) , registers the business and publishes the information in the Official Gazette of the MoJ.

2.2 Taxes
2.2.1 Tax Exemptions under Afghanistan Tax Law
Afghanistans Income Tax Law, enacted in 1965 and amended in 2005 and most recently in 2009, was modeled on the U.S. tax law. Article 10 of the IRoA Income Tax Law defines a category of "Tax Exempt Organizations similar to a charitable organization under Section 501(c)(3) of the U.S. IRS Code. To qualify as an exempt organization under Article 10, an organization must be (1) established under the laws of Afghanistan, (2) organized and operated exclusively for educational, cultural, literary, scientific, or charitable purposes and (3) contributors, shareholders, members or employees either during the operation or upon dissolution of the organization must not benefit from the organization. The contributions and income received from the necessary

operations of qualifying organizations are exempt from taxation.

2.2.2 Annual Tax Filing

The 2009 amendments to the Income Tax Law provide details of on the legal requirement for annual tax filing. Even though an entity may be exempt from taxes, the organization is still required to file a tax return if they fit the criteria as outlined in Article 87, regardless of the fact that they may owe no tax. Failure to file a return may result in penalties for failing to file. Annual income tax returns, as well as all other tax returns, are available at the Medium Tax Office.

2.2.3 Tax Exemptions for USAID Partners

The Point Four General Agreement for Technical Cooperation, dated February 7, 1951, is the framework bilateral agreement for all USAID activities in Afghanistan. It includes a provision that states that: Any funds, materials and equipment introduced into Afghanistan by the Government of the United States of America pursuant to such program and project agreements shall be exempt from taxes, service charges, investment or deposit requirements, and currency controls.

Subcontractors, subject to this Article are required, upon signing the subcontract, to send a copy of the subcontract to the Medium Tax Office. Natural persons who earn taxable salaries are excluded from this provision. Under the USAID Tax Exemption language in our SOAGs, the withholding only applies to national subcontractors, i.e. Afghan subcontractors. Foreign subcontractors are exempt from such withholding. However, USAID prime contractors/partners are not exempt from withholding this tax on their Afghan subcontractors. The S O A G e x e m p t s nonnational organizations and persons from the withholding not Afghan organizations or Afghan citizens. Foreign/International subcontractors to USAID prime contractors are exempt from taxes under the SOAGs, similar to their prime contractors. However, the legal division of the Afghanistan Revenue Department (ARD) must issue a letter (exemption certificate) to each exempt subcontractor in order to effect the exemption for administrative purposes under Afghan law.

The MoFA normally requires a letter of introduction from the Consular Office of the US Embassy in Kabul. However, the Consular Office has delegated the authority to provide introduction letters to USAID/Afghanistan. The delegation letter, Attachment 2, must be attached to the USAID introduction letter. 4 Articles 27 & 31 of Afghanistan NGO Law 5 The same delegation letter referenced in footnote 3 and found at Attachment 2 must also be attached to the USAID introduction letter to the MoFA for for-profit entities. 6 TIN: Individuals, companies and organizations which are, according to the Income Tax Law and the Customs Law, required to pay taxes or customs duties; social, non profit and welfare organizations which are required to withhold taxes from the salaries or wages of their employees are required to have a TIN.

In other words, each subcontractor must have an official exemption letter from the ARD. To obtain the exemption certificate, the prime contractor submits a letter to the ARD Legal Department on behalf

of its subcontractors requesting the exemption, i.e. a private ruling. A copy of the subcontractors cover sheet to its contract must be included with the request The Legal Department of ARD has copies of the SOAG, so it is not necessary to provide the SOAG as an attachment. The letter however should reference that the prime and the subcontractor are implementing a USAID activity under the applicable SOAG. The Legal Department will review the documents and issue a letter confirming exemption. If the exemption letter is not issued by ARD, the subcontractors will not be exempt from tax.

2.2.4 Scope of study

Question 1: Do the Tax Exemption Provisions in the Bilateral Agreement and SOAGs Provide a Blanket Tax Exemption for All USAID Implementing Partners for All Taxes in Afghanistan? No. For USAID implementing partners, the tax exemptions described here only apply to funds provided by USAID. For funds received from any other source, including other U.S. Government agencies, implementing partners should check with those donors to determine whether any such non USAID funds also benefit from a tax exemption. In addition, there are different tax exemptions for national and nonnational organizations. Question 2: How do the Tax Exemptions Affect Payment of the Rental Property Tax in Afghanistan? The rental property tax imposes a withholding tax on landlords for real property as follows: If the monthly rent is more than Afs.10, 000 ($200) and less than Afs.100, 000 ($2000) 10 percent. If the monthly rent is more than Afs.100, 000 ($2000) 15 percent.

The law requires the renter to withhold the tax on behalf of the landlord. The rental property tax is a tax on the landlord not on the renter. The withholding is merely transferring a part of the landlords income (the rent) to the GIRoA to cover the tax. Whatever the arrangement between landlord and renter, the USAID tax exemption is not applicable since the tax is on the landlord. Question 3: How do the Tax Exemptions Affect Payment of the Income Tax in Afghanistan? In Afghanistan, there is an income tax on organizations and individuals. There is also a business receipts tax (BRT) which is a type of income tax on gross receipts of forprofit organizations. The tax exemption described above exempts all nonAfghan national implementing partners (both organizations and individuals) from paying taxes on their income, profits, or property. This includes social security or other similar type of taxes. The exemption does not extend to Afghan nationals. USAID implementing partners are required to withhold income tax on their Afghan national 7 8 employees and subcontractors including BRT , The BRT is a tax which is collected from total gross income (sales) before any deduction. The exemptions are not applicable to Afghan organizations even though they are receiving USAID funds. Once again, however, it should be noted that the exemption only applies to USAID funds. Funds received by organizations or individuals that cannot be tracked back to USAID is not subject to the exemption. If organizations or individuals are receiving funds for assistance activities from other donors or other U.S. Government agencies, they should check with those donors or other U.S. Government agencies

to see if any tax exemptions are applicable to such funds. Question 4: How do the Tax Exemptions Affect Payment of Customs Duties, Tariffs, Import Taxes or Other Levies on the Importation, Use and ReExportation of Goods into or out of Afghanistan? The tax exemptions apply to all goods brought into the country for use on a USAIDfinanced assistance project. The exemption applies to such goods whether they are brought in by Afghan national or nonAfghan implementing partners. In addition, nonAfghan implementing partners may bring in personal belongings and effects for the nonAfghan national employees (including personallyowned automobiles, for example) for personal use (not for resale, however) and for the personal use of their family members. Question 5: How do the Tax Exemptions Affect Payment of the VAT, Sales Taxes, Taxes on Purchases or Rentals of Real or Personal Property or other Taxes Levied on the Last Transaction for the Purchase of Goods or Services Financed by USAID in Afghanistan? To the extent that such taxes are imposed, the tax exemption will apply for goods and services purchased for use in activities financed by USAID. To the extent the purchase of a good or service would not be an allowable cost under an implementing partners agreement with USAID, the exemption would not apply (for example, individual employees purchases of personal effects are not allowable costs under USAID assistance agreements and therefore would be subject to the sales tax should one be instituted in Afghanistan). Question 6: What Happens if the GIRoA Collects a Tax Despite the Existence of an Applicable Tax Exemption? USAID will work with the GIRoA through the MoF to try to ensure that, when exemptions apply, no taxes will be collected. However, it is likely that there will be cases where taxes will be collected despite the best intentions of all parties to comply with the terms of the Bilateral Agreement and SOAGs. USAID agreements with implementing partners should contain a provision related to reporting of foreign taxes. If an implementing partners agreement does not contain such a provision, it should contact its USAID Contracting Officer or Agreement Officer and request inclusion of such standard provision. USAID will then seek reimbursement of reported taxes from the GIRoA.
7

The income tax of legal persons is 20 percent of its taxable income in the fiscal year From Afs.0 to Afs.5,000 monthly - 0% From Afs.5,001 to Afs.12,500 - 2% From Afs. 12,501 to Afs. 100,000 - 10% + Afs. 150 fixed amount From Afs. 100,000 above - 20% + Afs.8,900 fixed amount
8

BRT is imposed on natural persons who provide goods or services in exchange for consideration and whose revenue from such sales is 750,000 Afghanis or more per quarter of the year

2.3 Limitation

2.3.1 Soag tax exemption provision 2.3.2 Section B.4. Taxation

(a) General Exemption: The Agreement is a program agreement under the terms of the Point Four General Agreement for Technical Cooperation, dated as February 7, 1951, between the grantee and the USG, and the assistance thereunder is free from any taxes imposed under laws in effect in the territory of the grantee. (b) Except as provided otherwise in this provision, the General Exemption in subsection (a) applies to , but is not limited to 1) any activity, contract, grant of other implementing agreement financed by USAID under this agreement, 2) any transaction or supplies, equipment, materials, property or other goods (hereinafter collectively goods) under (1) above, 3) any contractor, grantee, or other organizations carrying out activities financed by USAID under this agreement, 4) any employee of such organizations, and 5) any individual contractor or grantee carrying out activities financed by USAID under this agreement. (c) Except as provided otherwise in this provision, the General Exemption in subsection (a) applies to , but is not limited to the following taxes: 1) Exemption 1. Customs duties, tariffs, import taxes, or other levies on the importation, use and reexportation of goods or the personal belongings and effects (including personallyowned automobiles) for the personal use of nonnational individuals or their family members. Exemption 1 includes, but is not limited to; all charges based on the value of such imported goods, but does not include service charges directly related to services performed to transfer goods or cargo. Exemption 2. Taxes on the income, profits or property of all 1) nonnational organizations or any type, 2) nonnational employees of national and nonnational organizations, or 3) nonnational individual contractors and grantees. Exemption 2 includes income and social security taxes of all types and all taxes on the property, personal or real, owned by such nonnational organizations or persons. The term national refers to organizations established under the laws of the grantee and citizens of the grantee, other than permanent resident aliens in the US. Exemption 3. Taxes levied on the last transaction for the purchase of goods or services financed by USAID under this agreement, including sales taxes, valueadded taxes (VAT), or taxes on purchases or rentals of real or personal property. The term last transaction refers to the last transaction by which the goods or services were purchased for use in the activities finances by USAID under this agreement.

2)

3)

(d) If a tax has been levied and paid contrary the provisions of and exemption, USAID may, in its discretion, 1) require the Grantee to refund to USAID or to others as USAID may direct the amount of such tax with funds other than those provided under the agreement, or 2) offset the amount of such tax from amounts to be disbursed under this or any other agreement between the parties. (e) In the event of a disagreement about the application of an exemption, the Parties agree to promptly meet and resolve such matters, guided by the principle that the assistance furnished by USAID is free from direct taxation, so that all of the assistance furnished by USAID will contribute directly to the economic development of the country of the Grantee.

Chapter # 2

1. Literature view
1.1 Taxation and Governance The fundamental purpose of taxation is to raise revenue for financing public goods and services. An effective tax system therefore strikes an appropriate balance between public and private needs to achieve national development goals, given the prevailing structural and social conditions and political priorities (European Commission 2010a, 2). Developing countries, in particular, need to establish a tax system that is not only effective in mobilizing resources, but also one that distributes the tax burden fairly and minimizes tax distortions that can deter productive investment, spur costly resource misallocation, and impair growth. As the OECD (2008b, 21-2) points out, low-income countries face special challenges that affect the feasibility of raising taxes, including widespread poverty and illiteracy; hard-to-tax groups in subsistence agriculture and the informal sector; problematic accounting in the private sector; and a lack of skills for tax administration (including control of international tax leakages). Beyond these economic fundamentals, donors and development practitioners are deeply concerned to promote Good Governance in tax matters (EC 2010a, 2). The governance perspective focuses on how taxation affects state capacity, responsiveness, and accountability, the political drivers of tax reform, and governance constraints on the effectiveness of donor-supported tax programs. Four themes are prominent in the literature on taxation and governance. First, taxation is a central feature of the social contract on the role of the state, as defined by political institutions, influence networks, economic interests, social relationships, and government capabilities in each country. An effective program to strengthen a countrys tax system has to take into account the commitment of national leaders, the influence of interest groups, the political incentives for sustainable reform, the role for policy dialogue, and the quality of information available to decision makers and stakeholders on the effects of tax decisions. As Prichard (2010, 323) concludes from detailed case studies for Kenya, Ethiopia and Ghana, domestic political factors ultimately determine the course of tax reforms. Aid programs to support the tax system can only work when reforms are consistent with the domestic political agenda and they work best when accompanied by high-level political support. Hence, an understanding of the political economy of reform can be just as important as the technical analysis. A second theme is that taxation itselfalong with effective expenditure managementis a core capability for state-building and a basic component of good governance. Tax reforms can also be a point of entry for fostering broader improvements in state capacity (Brautigam 2008, 15). Any serious program for strengthening revenue performance creates a need for strengthening related functions like budget management, fiscal policy analysis, courts and the judiciary, and the agencies responsible for. The IMF (2011) points out that the combined impact of the tax system and the government expenditure program is what matters for equity and poverty relief. Nonetheless, an equitable tax system imposes a minimal burden on the poor and ensures that everyone pays their fair share.

This two-way interaction between taxation and governance suggests that there can be a virtuous circle in which tax reforms lead to governance improvements that in turn facilitate revenue mobilizationleading to more financing for essential public services, stronger government legitimacy, and faster progress towards ending aid dependency. 1.2 Afghanistan The Afghanistan case also highlights important political economy issues concerning tax reform in a low-income/post-war context. Afghanistan has one of the weakest tax collection capacities in the world. According to IMF estimates, government revenue as a percentage of non-drug GDP will be 5.4 percent in 2005-6, the lowest figure for any country in the world (Rubin, 2006: 26). James Boyce (2003: 7-8; forthcoming) suggests that fiscal capacity has been crucial for the viability and sustainability of the state, particularly given the short attention span and shifting priorities of external donors. What seems clear in the Afghan case is that the states command over legitimate force and legitimate fiscal capacities are closely interlinked, once again highlighting the limits of a purely technical approach to taxation. There are several insights on the relationship between state-building and public finance that are highlighted in Boyces work. First, there were three main principles that were important as foundations of sound revenue collections: a) the methods chosen should be easy to handle administratively; b) they should honour progressivity in order to reduce rather than exacerbate distributive tensions by taxing those with ability to pay; and c) they should be underpinned by legitimacy. Second, there is a need to re-think the policy of exempting high-income expatriates from paying taxes despite the fact that they often earn 100 times the national average salary. This exemption creates a demonstration effect to high-income nationals that it is legitimate for upper income groups not to contribute to tax collection. Boyce points to three tax measures which would help the international community to play a catalytic role in the revenue area, analogous to its potential role in the expenditure and security arenas: a) the introduction of an income tax on high income expatriates, voluntarily paid and a measure of high symbolic value; b) the introduction of income and urban property taxes on high income citizens because the influx of external resources is a major source of a considerable increase in income for some well-placed Afghan citizens; and c) a customs duty on imported luxuries that is backed up by the willingness of international actors to forego exemptions and immunities. Such measures could easily be put into practice administratively and work as a nucleus of revenue collection capacity while at the same time would

enhance legitimacy. It would also set the stage for state-elite bargains over tax collection to become an institutionalized feature of the polity. Given the weak state capacity to collect tax in Afghanistan, trade taxes will inevitably be the most feasible source of tax collection. However, raising the level of import taxes is not simply a question of trade policy. The inability of the Afghan state to control much of the territory outside the capital, Kabul, including border areas, impedes the collection of trade taxes. The presence of entrenched warlords weakens the states monopoly not only on revenue collection but also on the legitimate exercise of force (Boyce, forthcoming). In this sense, raising trade taxes will require increased military and security presence of the central state in border regions, a feat unlikely to be achieved without international military assistance. Clearly, in post-war economies, capacity to collect even the easiest taxes is closely linked to issues of security and the legitimate monopolisation of violence on the part of the central state. Carnahan (2007) argues that it makes sense for donors to enter into a multi-year compact with postconflict host government to provide matching funds for direct budget support purposes. The current arrangement in many post-conflict countries is that donors provide budget support when the government specifies its expenditure needs and calculates what its financing gap is. Donors then promise-with varying degrees of commitment, promises to finance the revenue shortfall. This system can create several problems. First, the incentive for the government to raise revenue may be diminished. Second, the capacity of the government to identify and assess macro-level expenditure revenue trade-offs are reduced as ministers are not forced to prioritise spending based on what revenues they can collect; instead they simply present a wish list. Third, there is considerable uncertainty and volatility in the actual aid flows that are dispersed creating problems for macroeconomic management and planning. The literature suggests that economic development is expected to bring about both an increased demand for public expenditure (Tanzi, 1987) and a larger capacity to meet these demands (Musgrave, 1969). Musgrave argues that the lack of availability of tax handles might limit revenue collection at low levels of income and these limitations should become less severe as the economy develops. Effectiveness of measures for increasing tax revenue must be estimated in order to identify their success. Analysis of buoyancy rate is a means for evaluating the effectiveness of policies for improvement in tax revenue. Since gross investment is one of the components of aggregate demand therefore tax buoyancy with respect to investment should also be estimated. There is a consensus in the literature on the use of per capita income as a proxy for the overall level of development. (Bahl, 1971 and Ansari, 1982). A higher per capita income reflecting a higher level of development is held to indicate a higher capacity to pay taxes as well as a greater capacity to levy and collect tax revenue (Chelliah, 1971). But it is also possible that per capita income cannot reflect the real impact on tax buoyancy due to uneven income distribution in the economy. Therefore in this study income per capita is not selected as an independent variable. Today the human development index (HDI) is sometimes considered to be a better indicator of welfare than income

per capita. However due to non-availability of timely HDI data, HDI is also not taken into account in this study. Tanzi in a study emphasizes that trade taxes have historically been a major source of government revenue during the early stages of economic development because they are easier to collect than domestic income and consumption taxes when tax administration is rudimentary and tax handles are limited, (Tanzi 1989). This is also supported by a study by Linn and Weitzel (1990) which shows that the administrative ease with which trade taxes can be collected makes them an attractive source of government revenue when administrative capabilities are scarce (Linn and Weitzel, 1990). Therefore volume of trade has been given importance as a determinant of tax revenue specially in developing countries at early stages of development. The existence of a large public debt has important implications for the taxation potential of a country. With a large debt, the government needs to raise revenues necessarily. When the interest on the debt exceeds net borrowing plus the possible reduction in non- interest expenditure, the level of taxation must go up unless the rate of growth of the economy is high enough to neutralize this increase. Therefore public debt and government spending play a role in determining the extent to which countries may take advantage of their taxable capacity (Tanzi, 1987). Therefore this study also considered debt as a determinant. Public debt may be financed through inflationary financing, which results in acceleration of inflationary pressure. As a result the real value of tax collection falls because of the inevitable lag between the date the tax is due and its date of collection (Tanzi, 1988, 1989, Blejer & Cheasty, 1989; Linn & Weitzel, 1990). Therefore, the size of the public debt is expected to be a positive determinant of the buoyancy rate. A countrys economic structure is one of the factors that could be expected to influence the level of taxation (Tanzi, 1992). An economy with a large GDP share of agriculture value added is expected to generate low tax revenues. Due to political reasons, it is usually difficult to directly tax the agricultural sector in Afghanistan, though it is often very heavily taxed in many implicit ways, e.g., through import quotas, tariffs, controlled prices for output, and overvalued exchange rates (Bird, 1978; Ahmad and Stern, 1991). Tax evasion is considered to be of serious concern to those dealing with taxation issues of a country because of several reasons, the major being that it results in the loss of revenue. Pyle (1989) points out that one of the implications of the existence of the underground economy is that some income goes untaxed and also certain indirect taxes are also evaded. Thus in this study a short fall in tax revenues (SFTR)1 will be considered as a proxy to represent tax evasion. These shortfalls in tax revenues are normally inclusive of those shortfalls that are due to tax avoidance but not tax evasion. The expected sign of buoyancy rate for tax revenue due to SFTR is negative.

Estimating income tax elasticity is useful for determining the extent of the sensitivity and response of the tax system to the changes that take place in the composition and value of GDP. Moreover, a

quantitative measure of the effectiveness of tax policy in terms of stimulating public resources, is given by the relationship between the proportional changes in tax revenue and those of national income (Harvey, 1993), and this relationship is measured by income tax elasticity. The elasticity of yield is an important aspect of the tax structure (Goode, 1984), and overall measures of elasticity and buoyancy may be useful as a descriptive tool, which may lead to further questions and point to a more detailed examination of particular taxes in certain countries (Ahmad and Stern, 1991). There is a large literature on public finance policies and systems in developing countries that explores various options for raising revenue (collecting taxes, fees, and rents, foreign borrowing, expanding the money supply), various criteria for allocating expenditure (equity, efficiency), and optimal means for managing and executing expenditures (autonomous revenue authorities, tax/customs administration, financial management and treasury systems, etc.). Several handbooks summarize these lessons for policymakers (see, for example, World Bank 1998, McLaren 2003). This literature also discusses how fiscal policy impacts and is impacted by macroeconomic stabilization, economic liberalization, poverty reduction, fiscal sustainability, etc. (see, for example, Bird and de Jantscher 1992, Patel 1997, Toye 2000). There is little discussion of the unique challenges faced by post-conflict countries (i.e., post-war crime waves, implementation of costly peace agreements, war economies, political and social polarization, low absorptive capacity and dramatic spikes in international aid) and the extent to which this larger literature is still applicable in post-conflict settings. Fafo organized one meeting on post-conflict public finance at the World Bank in 1999 at which considerable interest was expressed in developing new research in this area (Fafo 1999). Addison and Ndikumana (2001) argued that the new state agenda in Africa is both ambitious and essential and generating additional revenues to address the fiscal crisis of the African state is a precondition for statebuilding in Africa. These fiscal crises are most severe, they argued, in conflicted and post-conflict countries, calling for reduced military spending; more grant aid, and more debt relief to free up additional resources for core spending. They did not address cases outside Africa nor examine how to prioritize non-defense expenditures. While Addison and Ndikumana cast fiscal policy as a precondition for statebuilding, Bird et al. (2004) argue that a more legitimate and responsive state is a precondition for improving fiscal policy, bringing in societal factors often overlooked in the public finance literature (but not looking specifically at post-conflict countries). Addison and Roe (2004) examine the fiscal costs of conflict and explore strategies for revenue mobilization in post-conflict recovery, exploring the strongly criminal dimension that many conflicts take on and the particular challenges this raises for public finance, as well as other ways in which conflict may impact the motives of key actors.

They did not specifically evaluate the effectiveness of various international interventions, nor how to prioritize expenditure. Gupta et al. (May 2004) analyzed the types of fiscal advice provided by one institution (the IMF) to post-conflict countries and concluded that additional research is need to ascertain the track record of countries in implementing these recommendations and what progress

has been made toward more permanent improvements in the operations of fiscal institutions. Finally, Collier (forthcoming), in contrast to research by Addison and Ndikumana, argues that taxes should be kept low in post-conflict countries to avoid choking off economic recovery (Collier forthcoming). International financial institutions (IFIs) policy in this area is key given their strong intellectual leadership. In 1998, the Banks Operations Evaluation Department produced a five-volume report on The World Banks Experience with Post-conflict Reconstruction, analyzing all Bank operations in El Salvador, Bosnia, and Uganda, and an overview of experiences in Cambodia, Eritrea, Haiti, Lebanon, Rwanda, and Sri Lanka. This study concluded that if tax effort and the pattern of public expenditures have a direct bearing on post-conflict reconstruction, as they did in El Salvador, it is legitimate to include these parameters in the conditionality agenda (Kreimer et al. 1998). However, it was not until 2003 that the World Bank acknowledged officially that, in post-conflict settings, the main objective over the short to medium term must be to consolidate peace. (World Bank, 2003) This represents a break with the previously held view that these were political matters beyond the Banks purview. After 9/11, the Banks Low-Income Countries Under Stress or LICUS Initiative began to study how standard approaches to institution-building need to be adapted to fit low-capacity countries (i.e., identification of zero-generation reforms) and an evaluation of this initiative will be produced by the World Banks evaluation office in 2006. The International Monetary Fund (IMF) has also modified some of its normal policies and practices, but has not introduced institutional changes comparable to those at the World Bank. At the level of formal policies, the main innovation has been the expansion of the Funds emergency assistance window to cover specifically post-conflict assistance. In addition, Fund staff members have played key roles in re-establishing monetary, financial, and fiscal systems in places where they must be built more or less from the ground up, as in Bosnia, East Timor, Kosovo, and Afghanistan. Boyce (2004) reviews these openings for policy change within the IFIs and makes several recommendations for more conflict sensitive approaches, several of which relate directly to public finance (i.e., greater attention to horizontal inequalities, revenue mobilization, rethinking macroeconomic stabilization, and tackling the legacy of odious debts). Post-conflict Transitions: The second literature is the literature on post-conflict transitions which focuses on distinct types of transitions, critical risk factors, and various strategies and elements to strengthen peace and prevent a relapse into conflict.

The peace literature has emphasized the importance of security (i.e., demobilization, disarmament and reintegration of combatants, police reform, civilian control of reformed militaries, international peacekeeping and constabulary forces), justice (i.e., criminal justice systems, transitional justice and truth commissions, international criminal courts), political reform (i.e., constitutional reform and elections), and building conflict management capacities throughout society. Within this literature,

public finance issues have received very little attention and, as a result, there is little awareness among policymakers of the links between the states ability to manage public resources and its ability to manage conflict. Woodward argues that no international or local action in support of peace can occur without a budget or donor to tap and yet economic aspects of peace agreements tend to take a backseat to security concerns (Woodward 2002). Exceptions include case studies on El Salvador (Boyce) and also Guatemala where the fiscal pact was closely linked to implementation of the peace accords (Stanley and Holiday 2002). CICs research on post-conflict public finance will undertake a series of country case studies focused explicitly on public finance and its links to building states and building peace. Drawing on these case studies, it will develop a set of recommendations for improving international assistance in this area, making an important and unique contribution to knowledge in both the public finance and post-conflict transition fields. Line Ministries in Kabul and Provincial Mustofiats ( provincial offices of the Treasury) and the development of Payroll Systems; (iii) to develop capacity of Treasury Department civil service staff in the areas of basic skills (English language, basic computer literacy and office skills); technical skills (public finance management theory and advance information technology); and job-specific skills, including the development of training curriculum. MOF IT 2 Systems Overview

1.4 Capacity Development Background Currently, the majority of key civil service positions are filled and civil service personnel do most of the day-to-day work of the Treasury Department. Although the staffing situation has improved, attraction and retention of suitably skilled and qualified staff remains the key

support such as the re-design of business processes, training of users and guidance and help desk operations.
2

Control menu is used for Chart of Accounts, system configuration and user management. Financial reporting includes standard basic reports for users (frontend) and advanced reports, which are produced by custom means (backend). There is no electronic interface between Free Balance and other systems at the moment, except SDU database, which reads data from AFMIS. Treasury has 500 user licenses for existing Free Balance modules at the moment. Users from Line Ministries and Provinces use Terminal servers to access AFMIS. 1.3 Selected Bibliography Tony Addison, Alemayehu Geda, Philippe Le Billon, and S. Mansoob Murshed, Financial Reconstruction in Conflict and Post-Conflict Economies, Discussion Paper No. 2001/90. Tony Addison and Leonce Ndikuman, Overcoming the Fiscal Crisis of the African State, WIDER Discussion Paper No. 2001/12, June 2001. Richard M. Bird and M. Casanegra de Jantscher (eds.), Improving Tax Administration in Developing Countries, Washington, DC, International Monetary Fund, 1992 Richard M. Bird, Jorge Martinez-Vazquez and Bennon Torgler, Societal Institutions and Tax Effort in Developing Countries, ITP Paper 04011, 2004 James K. Boyce (ed.), Economic Policy for Building Peace: The Lessons of El Salvador, Boulder, CO: Lynne Reinner, 1996 James K Boyce, Investing in Peace: Aid and Conditionality after Civil Wars. Oxford: Oxford University Press, 2002 Paul Collier, Post-conflict Economic Recovery, draft chapter submitted to the International Peace Academy, November 2004 Bird, R.M. (1978), Assessing Tax Performance in Developing Countries: A Critical Review of the Literature, in Taxation and Economic Development. Blejer M.I. and Cheasty A. (1989), Fiscal Implications of Trade Liberalization, in Fiscal Policy in Open Developing Economies, ed. By Vito Tanzi, IMF. Chelliah R.J. (1971), Trends in Taxation in Developing Countries, IMF Staff Papers, Vol. 18, No. 2, July, pp. 254-325. Choudhry, N.N. (1979), Measuring the Elasticity of Tax Revenues: A Divisia Index Approach, IMF Staff Papers, vol. 26, March 1979. Linn F.J. and Weitzel D. (1990), Public Finance, Trade and Development: What Have We Learned? in Fiscal Policy in Open Developing Economies, ed. By Tanzi, pp. 9-28. Boyce, J. 2003. Fiscal Reconstruction of the State, Symposium on State Reconstruction and International Engagement in Afghanistan, sponsored by the Centre for Development Research, University of Bonn, and the Crisis States Programme, Development Research Centre, London School of Economics, 30 May- 1 June, Bonn. Carnahan, M. 2007. Options for Revenue Generation in Post-Conflict Environments, Center on International Cooperation and Political Economy Research Institute.

Rubin, B. 2006. Afghanistans Uncertain Transition from Turmoil to Normalcy, Council on Foreign Relations Paper No. 12, March

Chapter # 03
1. Methodology
Each sectors major stages are identified and examined. The key players are recognized and their roles analysed to better understand the sectors dynamics. Special attention is paid to market irregularities, barriers to entry, and business environment. Access to finance, distribution networks, and transportation are all scrutinised to seek out opportunities for leveraging or improvement. This initial analysis forms the basis for an overview of the current state of the sector, from which market trends and shifts can be forecast. This knowledge is crucial to understanding how each sectors potential can be optimised. The following analyses are then performed to synthesise the findings and form a comprehensive picture of the sectors and the opportunities they present. 1. Market Study: For each sector, the market potential is determined by looking at the national market, and where relevant, the international market. Given the scarcity of existing data on the Afghan market, interviews and market surveys are used to establish consumption patterns, estimate market sizes, and identify opportunities. The regional/international market potential is established primarily through secondary research. 2. Mapping of Value Chains: Each sector's value chain is defined and described along with its main components, mainly through interviews with key stakeholders at all levels of the value chain. Where appropriate, interviews are conducted in a variety of provinces, to ensure that regional differences across Afghanistan are taken into consideration. These interviews allow us to understand the main components of each sector's value chain, the types of players in each component, distribution of value along the value chain, synergies between different levels, main drivers of cost and quality in the sectors, international comparisons of cost, and quality

and variety of products. 3. Detailed Sector Analysis and SWOT Analysis: The detailed sector study and SWOT analysis synthesize the demand-side (market study) and supply-side (value chain mapping) studies. Key support activities that may act as either enhancers of growth or bottlenecks in the value chain are incorporated into the SWOT analysis. 4. Overview of Financial Support: Access to financial support is addressed in detail. The aim is to understand what financial support is available to Afghan entrepreneurs, what variations e x i s t a c r o s s sectors, and how the e x i s t i n g structures can be leveraged or improved. The main issues addressed concern what financial support exists in Afghanistan, which channels entrepreneurs and SMEs go to for financing, and if certain sectors or certain types of players are more affected by the lack of access to finance. This overview is based on a series of interviews and secondary data.

1.1 Introduction
This section presents the area of study, sampling that sample size, and sampling techniques, research design, research strategy, data collection methods, data analysis methods and limitation of the study. 1.1.1 Research design plan: In development of this research paper we conducted Descriptive type of research in order to elaborate how is the financial performance and performance of Pashtany bank. 1.1.2 Sample design plan: As our paper is technical in nature, therefore we took a set of economist which was ranging from 2 to 4 people working as professors in universities or as key positions holders in Pashtun banks

1.2 Data collection Method& Data source plan:

Both primary and secondary collected for this study. The techniques for data collection method, which are applicable to the qualitative research process, were therefore use. Primary data techniques used include:

The archived data of the interview Self-Completion Questionnaires.

1.3 Data analysis methods:

The study used qualitative methods to analyze the collected data. Tables and figures present the results. The

researcher combined the information from all sources of information that is interview, Questionnaire , observation, and secondary sources. Moreover, the study integrated the evidence in the study site with the lessons Pashtany bank activities, and its sustainability. from other studies relating to

1.4Assumption & Limitation:

It is assumed that that respondents have enough information about the subject matter, It is assumed that the asked question from the participant group really address the It is assumed that the gathered data from the various related source are reliable. Due to absence of proper research conducting system in Afghanistan there isnt any Fewer and probability unverifiable data in Census office. Shortage of time

(Assumption is based on their professional background). subjected issue.( Question are prepared with greater focus and logical linkage)

referring source for technical and professional support.

1.5 Time scale:

The initial work starts at 1st September and the final work will be finished at 15th Mar in the above given time line the following task will be performed: 1st -15th September : Focus groups interview of (10) participants in two groups and (3) participants

individually.
1st_ 15thSeptember: Checking out the web sites of concerning ministries, study and exploration of

required data from journal official magazines and other related sources.
15th-25th September: preliminary data analysis, editing and coding. 25th-7th October: Data cleaning and secondary Analysis. 7th -15th October: Research report writing and review.

Chapter # 4
4.1 Results and discussion
Enterprise (Afghanistan) BALANCE SHEET AS AT DECEMBER 31, 2010 PROPERTY, PLANT & EQUIPMENT NOTE 2010 2009 USD USD FIXED ASSETS - TANGIBLE
At Cost less: Acc. Depreciation

4 6,600,004 5,307,204

CURRENT ASSETS Stock in trade Store, Spare and Loose Tools Trade Receivable Advances, Deposit and Prepayments Cash and Bank balance TOTAL ASSETS LESS: CURRENT LIABILITIES Trade Creditors Accrued and Other Payable 10 11 535,294 6,287 541,581 7,481,163 5 6 7 8 9 696,542 16,175 486,622 214,729 8,673 1,422,741 8,022,744

786,532 11,909 601,108 131,873 6,142

1,537,564 6,844,768

491,311 5,232 496,543

NET ASSETS REPRESENTED BY: Owners' equity TOTAL EQUITY

Auditors' report is annexed thereto. The annexed notes form an integral part of these financial statements.

6,348,225

12

7,481,163 7,481,163

6,348,225

6,348,225

KA BUL

PRESI DENT

FINANCE MANAGER

NOTE

2010 USD

2009 USD

Revenue Sale of Goods Cost of Revenue Gross profit Operating expenses Administrative and Selling Finance charges

13 14

24,562,009 23,243,923 1,318,086

19,800,451 18,594,356 1,206,095

15 16

169,508 169,508 1,148,578

157,451 157,451 1,048,644 1,048,644 1,048,644 1,048,644

Operating Profit Add; other Income Net profit/ (Loss) for the year 17

1,148,578 -

Net Profit (Loss) for the Year Accumulated profit/(loss) brought forward Accumulated profit/(loss) carried forward
The annexed notes form an integral part of these financial statements.

1,148,578 1,048,644 2,197,222

KAB

UL

PRESI DENT

FINA NCE MAN AGE R

2010 USD CASH FLOW FROM OPERATING ACTIVITIES Profit/(loss) before Taxation Adjustment for: Depreciation 327,000 1,475,578 89,990 (4,266) 114,486 (82,856) 43,983 1,055 162,392 1,637,970 1,148,578

2009 USD

1,048,644

355,208 1,403,852 (786,532) (11,909) (601,108) (131,873) 491,311 5,232 (1,034,879) 368,973

(Increase) in stock/Inventory (Increase) in stores and Spare (increase) in Receivables (increase) in Advances, Deposit and prepayments (decrease) in Trade & other payables Increase in others Cash generated (used in) from operations Tax paid CASH INFLOW/(OUT FLOW) FROM OPERATING ACTIVITIES

CASH FLOW FROM INVESTING ACTIVITIES Purchase of fixed assets CASH OUT FLOW FROM INVESTING ACTIVITIES CASH FLOW FROM FINANCING ACTIVITIES Capital introduced Drawings CASH IN FLOW FROM FINANCING ACTIVITIES (15,641) (15,641) (7,652) 5,299,581 (1,619,800) (1,619,800) (5,662,412) (5,662,412)

NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEA CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR

2,530 6,142 8,673

6,142 6,142

KABUL

PRESIDENT

FINANCE MANAGER

4.2 Status and nature of business

M/s Surat Zada group is registered with the Afghanistan Investment Support Agency under registeration number D - 31355. The company is engaged in the business of Trading of Mobile Cards,Sims, Wheat, Marble, flour manufacturing and other General Trading.

4.3 Basis of preparation

4.3.1 Stement of compliance
These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as applicable in Afghanistan. 4.3.2 s of Meas ureme nt these financial statemnts have been prepared under the historical cost, except monetary assets and liabilities in currancy other than reporting currency which are stated as per accounting policy of foreign currency transactions. Use of estimates and Judgements The preparation of financial statements in cdonformity with approved accounting standards require managements to make judgtements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expense. the estimates and associated assumptions are based on historical experiance and various other factors that are believed to be reasonable under the circumstances, the result of which from the basis of making the judgements about carrying value of assets and liabilites that are readily not apparent from other sources.

4.3.3 B a s i

4.4 Summaries of significant accounting policies

4.4.1 Basis of measurement and accounting convention
These financial statements have been prepared under the historical cost convention.

The preparation of financial statements in confirmity with approved accounting standards require management to make judgements, estimates and assumptions that effect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the result of which form the basis of making the judgements about carrying value of assets and liabilities that are readily not apparent from other sources. Actual result may differ

4.4.2

Property, plant and equipment

These are stated at cost less accumulated depreciation and impairment losses, if any, except land which has been stated at cost. Cost comprises acquisition and other directly attributable costs. The asset is capitalized on the basis of probability of future economic benefit and the reliability of the cost. Some fixed assets has been purchased by the owners of the Company but has been recognized in the accounts because economic benefits is being utilized by the Company in the present and probably in the future by considerng the intention of the owners. Depreciation is provided on reducing balance method and charged to profit & loss account to write off the depreciable amount of each asset over the useful life at the rates specified in the note 4. Depreciation is calculated on the annual basis. Full year depreciation is charged in the year of acquisition and no depreciation is charged in the year of disposal. Maintenance and normal repairs are charged to income as and when incurred; major renewals and improvements are capitalized. Gains or losses on disposal or retirement of fixed assets, if any are taken to the profit and loss account for the year. The Company reviews the useful life and residual value of property, plant & equipment on regular basis. Any change in estimate in future years might effect the carrying value of thasset alongwith the depreciation value.

4.4.3

Impairment

The carrying amounts of assets are reviewed at each balance sheet date for impairment, whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. If such indication exists, and where the carrying value exceeds the estimated recoverable amount, assets are written down to their recoverable amount. The resulting impairment loss is taken to the profit and loss account.

4.4.4

Trade debts

Receivables are measured at original invoice amount less an estimate made for doubtful receivable, if any, based on review of all outstanding amounts at the year end. Bad debts are written off when identified. 4.4.5 Trade and other payables Liabilities for trade and other amounts payable are measured at cost which is the fair value of the consideration to be paid in future for goods and services received.

4.4.6

Transactions in other currencies

Transactions in currencies other than the reporting currency (US Dollar) are accounted for at the exchange rates prevailing on the date of transactions. All monetary assets and liabilities denominated in currencies other than the reporting currency at the year end are translated at exchange rates prevailing on balance sheet date. Non monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of transaction, if any. Exchange differences are included in the

4.4 6 Revenue recognition

Sales revenue are recognised when goods are sold and the significant risks and rewards regarding ownership are transferred to the customer. Revenue from sales is measured at fair value of the consideration received or receivable, net of returns and trade discounts, if any.

4.4.7 Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and at banks. Cash equivalents are highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.

4.4.8 Financial instruments

Financial assets and liabilities are classified and stated at values determined according to substance of contractual arrangements. Financial instruments include receivables, cash and bank balances, creditors and other liabilities. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item.

4.4.9 Loans and Borrowings

Loans and borrowings are initially recognized at the proceeds received, subsequent to initial recognition, these are stated at amortized cost.

4.410 Borrowing cost

Mark up, interest and other charges on borrowing are recognized as an expense in the period in which it is incurred.

4.5

ENTERPRICE IN AFGHANISTAN

NOTES TO THE ACCOUNTS FOR THE PERIOD ENDED DECEMBER 31, 2010 4. PROPERTY, PLANT & EQUIPMENT

C O O N As at

D E P R E C I A T I

W . D. V.

As at For the Add Dell 31-Dec-10

Rate

As at

Adjus t ment

As at 31-Dec-10

As at 31-Dec-10

PARTICULA RS

01-Jan09

% 01-Jan-09 Period

. ..USD Land 540,000 1,895,200 2,024,600 2,203,734 3,025,000 2,450,250 45,600 32,946 15,670 12,693 11,542 5,181 1,355,200 1,895,200 -

Building

264,600

2,289,200

40,492

44,974

85,466

Plant and Machinery

3,025,000

10

302,500

272,250

574,750

Vehicles Furniture and fixture

45,600 15,670

15 10

6,840 1,567

5,814 1,410

12,654 2,977

Computer and equipments

11,542

33

3,809

2,552

6,361

USD 2010 USD 2009

5,662,412 6,600,004

1,619,800

7,282,212 5,662,412

355,208 2010

327,000 355,208 2009 USD 284,166 71,042 355,208

682,208 355,208

5,662,412 5,307,204

4.1 Apportionment of depreciation expense Depreciation charged to cost of sales Depreciation charged to general and administrative expenses Total

USD 261,600 65,400 327,000

NOTE 4. PROPERTY, PLANT & EQUIPMENT

Fixed Assets Schedule attached at end.

2010 2009 USD USD

5. STOCK IN TRADE Stock in Trade

5.1 786,532

696,542

696,542 5.1 Stock in Trade Closing Stock- Flour Mil Closing Stock- Marble Factory Closing Stock- Mobile Cards and Sims Closing Stock- Other Goods 5.1.1 Closing Stock- Flour Mil Finished goods - Flour Raw Material - Wheat 5.1.1 5.1.2 204,497 104,481 303,979 83,585 696,542 132,923 71,574 204,497 5.1.2 Closing Stock- Marble Factory Finished goods - Marbel Tiles etc Raw Material - Marbel 67,913 36,568 104,481 6. STORE, SPARE AND LOOSE TOOLS Store, Spare and equipment Stationary Items 7. TRADE RECEIVABLE Trade receivables Other Receivable 8. ADVANCES, DEPOSITS AND PREPAYMENTS Advance to Parties - Director (for purchase) Advance to employees Advance for exp. 9. CASH AND CASH EQUIVALENTS Cash in hand Cash at bank - NBP 15,609 566 16,175 470,992 15,630 486,622 208,481 5,680 568 214,729 9.1 8,664 9 8,673

786,53

318,998 117,980 255,170 94,384 786,53

207,349 111,64

318,99

76,687 41,29

117,98

11,457 45 11,90

586,548 14,560 601,10

115,897 15,600 37 131,87

6,124 1 6,14

NOTE 9.1 Cash in hand Cash in hand Afs Cash in hand USD 8,664 10. TRADE CREDITORS Trade Creditors Other Payable 535,294 11 ACCRUED AND OTHER PAYABLES Audit fee Salaries and wages Other accrued

2010 2009 USD USD 3,566 1,561 5,098 4,563 6,124 500,762 445,621 34,532 45,690 491,311 700 700 3,134 2,972 2,453 1,560 6,287

12 OWNER EQUITY 5,232 Schedule attached at the end: 13. REVENUE

Sale of Goods

13.1 24,562,009 19,800,451 24,562,009

13.1 Sale of Goods Sale of Goods - Wheat/Flour Sale of Goods - Mobile Cards and Sims Sale of Goods - Marbel etc Sale of Goods - Others

19,800,451 6,015,117 3,954,329 15,915,150 11,789,000 1,228,100 1,782,041 1,403,642

24,562,009 14. COST OF REVENUE Cost of Sale

2,275,081 19,800,451

14.1 23,243,923 18,594,356 23,243,923

14.1 Cost of Sale Opening Stock Purchases Direct Cost Depreciation Less: Closing Stock

18,594,356

14.1 14.2 4.1

786,532 22,172,452 719,881 261,600 23,940,465 696,542 23,243,923

17,662,002 1,434,720 284,166 19,380,88 786,53

18,594,35

NOTE 14.1 Purchas es Purchase of Goods - Wheat/Flour Purchase of Goods - Mobile Cards and Sims Purchase of Goods - Marbel etc Purchase of Goods - Others 22,172,452 14.2 Direct Cost Salaries and wages 1,047,345 Transportation Other Direct Cost 172,166 719,881 15. GENERAL AND ADMINISTRATIVE EXPENSES Salaries, wages & benefits Repair and maintenance Internet Communication Traveling exp. Food Exp. Entertainment Staff welfare exp. Stationery exp. Mic. Exp.

2010 2009 USD USD 4,812,094 3,558,896 15,198,968 11,258,495 1,105,290 1,603,837 1,056,100 1,240,774 17,662,002 525,513 107,982 215,208 86,386 1,434,720

39,101 35,671 12,487 11,892 18,000 12,000 1,214 1,156 4,759 4,532 6,050 5,762 2,217 2,111 2,625 2,500 2,413 2,298 14,543 7,787

Audit fee Depreciation 16. FINANCE CHARGES Bank charges 17. OTHER INCOME Other Income 4.1 71,042 169,508

700 700 65,400 157,451

18.

FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES 18. FINANCIAL 1 ASSETS AND LIABILITIES 2010 Mark - up / Interest bearing Maturity Within One year one year to 5 year USD Non mark - up / Non interest bearing Maturity Within one One year year to 5 year USD

Total

USD

Financial assets Stock in trade Store, Spare and Loose Tools Trade Receivable Advances, Deposit and Prepayments Cash and Bank balance

696,542 16,175 486,622 214,729 8,673 -

696,542 16,175 486,622 214,729 8,673

1,422,741 1,422,741

Financial liabilities Trade and other payables

541,581 -

541,581

541,581 541,581

Net financial assets / (Liabilities) 2010 OFF BALANCE SHEET ITEMS CONTINGENCIES 2010 2010

881,160

881,160

- COMMITMENTS -

Effective interest rates for the monetary financial assets and liabilities are mentioned in the respective notes to the financial statements.

4.6 RISK

MANAGEMENT

4.6.1 Liquidity Risk

Prudent liquidity risk management Implies sufficient cash and marketable securities, the availability of funding to adequate amount of committed credit facilities and the ability to close out the market position due to dynamic nature of the business. The company follows an effective cash management and planning policy to ensure availability of funds and to take appropriate measures for new requirements.

4.6.2 Concentration of credit risk

The management monitors and limits the company's exposure to credit risk through monitoring of client's credit exposure. The company's credit risk is primarily attributable to its contract receivables and its balances at banks. The credit risk on liquid funds is limited because the counter parties are bank with reasonably high credit ratings.

4.6.3 foreign exchange risk

foreign currency risk arises mainly where receivable and payables exist due to transaction in foreign currencies. As the company's reporting currency USD is itself a foreign currency in Afghanistan, so its risk is restricted to the bank balances, trade debts and payables and all other transactions in the local currency and foreign currency (other than the reporting currency USD)

4.6.4 Interest rate risk

Interest rate risk arises from the possibility that changes in interest / mark up rates will affect the value of financial instruments. In respect of interest / mark up bearing financial assets and liabilities, the respective notes indicate their effective interest / mark up rates at the balance sheet date tand the periods in which they re-priece or mature. The management regularly monitors interest rate fluctuations and maturities of various assets and liabilities to maintain the maturity gaps within acceptable levels.

Chapter # 05
Conclusion and recommendations
5.1. Discussion
Afghanistan's legal system has undergone several dramatic changes since 2002, with profound consequences for civil society and not-for-profit organizations (NPOs). In November 2002, the Transitional Government of Afghanistan adopted the Law on Social Organizations, enacted in light of Afghanistan's 1964 Constitution. In January 2004, a new Afghan Constitution was adopted. Article 35 of the Constitution grants the citizens of Afghanistan the "right to form social gatherings for the purpose of securing material or spiritual aims in accordance with the provisions of the law." The Constitution also recognizes the freedoms of expression and assembly (or "demonstration"). (Articles 34, 36) In June 2005, President Karzai approved the Law on Non-Governmental Organizations (NGOs), which became effective immediately upon signing. The Law created a new legal framework for NGOs in Afghanistan, replacing the Regulation for the Activities of Domestic and Foreign NGOs in Afghanistan (NGO Regulation), enacted in 2000 by the Taliban regime. Both the Law on NGOs and the Law on Social Organizations remain pending before the Afghan National Assembly, as part of the process by which all laws enacted before the seating of the Afghan National Assembly must be reviewed and approved by the Assembly. In the absence of review by the National Assembly, however, both laws remain in full force and effect.

5.1 .Conclusion
This thsis has begun our study of Afghan commercial law by exploring Afghanistans economy and business environment. Understanding these two areas is crucial for a more detailed examination of the history of commercial law in Afghanistan, which begins in Chapter 2. It also began our consideration of Islamic commercial law, a topic of immense importance in Afghanistan that will receive attention throughout this text. This Chapter also provided a basic overview of the connection between law and economic development. It presented different views from the law and development debate. Among them was the neo-institutionalist view, which argues that the quality of a countrys institutions is a direct determinant of its economic growth. It also explained why enforceable promises are the key to commerce. The lack of enforceable promises

greatly increases uncertainty, risk, and costs associated with business transactions, thereby restricting commerce and growth. Simple transactions, such as point transactions at the bazaar, do not require strong commercial laws (or any commercial laws, for that matter) because promises are enforced in person at the time of transaction. However, once the quid and quo are separated, commerce becomes more complicated. Commercial law evolved over time to empower commercial actors and enable them to engage in sophisticated transactions.

5.1.1 Tax Laws

The Income Tax Law establishes a category of exempt organizations, which includes organizations that meet the following criteria:

The organization must be established under the laws of Afghanistan; The organization must be organized and operated exclusively for educational, cultural, literary, scientific, or charitable purposes; and Contributors, shareholders, members or employees either during the operation or upon dissolution of the organization mentioned in sub-paragraphs 1 and 2 of this paragraph must not benefit from the organization.

Qualifying organizations are exempt from taxation on contributions received and on income from necessary operations. The Customs Law does not exempt NPOs per se, but does exempt certain categories of goods, including: those imported by private foreign and international relief and development agencies and certain other goods, upon recommendation and approval of the Minister of Finance and the Council of Ministers respectively.

5.1.2 Tax Exemptions

Afghanistans Income Tax Law, enacted in 1965 and amended in 2005, was modeled on U.S. tax law. [4] The Income Tax Law defines a category of "Tax Exempt Organizations" (Article 10). To qualify as an exempt organization, an organization must be (1) "established under the laws of Afghanistan," (2) "organized and operated exclusively for educational, cultural, literary, scientific, or charitable purposes," and (3) "[c]ontributors, shareholders, members or employees either during the operation or upon dissolution of the organization must not benefit from the organization." The contributions received and income from the necessary operations of qualifying organizations are exempt from taxation.(Income Tax Law Article 10(1)) The Afghan Ministry of Finance has made available an Income Tax Manual, which provides guidance on application procedures for exempt status, as well as the application form. The Income Tax Manual underscores the fact that it is the Ministry of Finance, and not the organization itself, that determines whether or not the organization qualifies for the exemption. [5]

5.2 Recommendation

5.3 Reference
Ali Adnan Ibrahim, The Rise of Customary Businesses in International Financial Markets: An Introduction to Islamic Finance and the Challenges of International Integration (2008) Booz Allen Hamilton, Commercial Law and Microeconomic Reform (2007) Chibli Mallat, Commercial Law in the Middle East: Between Classical Transactions and Modern Business (2000) Dani Rodrick, One Economics-Many Recipes (2007) Frederick Perry, Shariah, Islamic Law and Arab Business Ethics (2007) Kenneth W. Dam, The Law-Growth Nexus: The Rule of Law and Economic Development (2006) Michael Stepek, The Importance of Commercial Law in the Legal Architecture of PostConflict New States (2008) Nicholas Foster, Islamic Commercial Law: An Overvie(2006) USAID, Afghanistans Agenda for Action (2007) World Bank, Doing Business 2009, Country Profile for Afghanistan (2009)