AS the American and western misadventure in Afghanistan draws down, these countries are already thinking about how to engage with the future rulers of that ill-fated land-locked country full of sturdy people and natural resources. Russia in its earlier avatar of the Soviet Union had returned with ignominy that actually gave rise to the terrorist group nurtured in Pakistan that gave shelter to other terrorist groups that were involved in 9/11 leading to the American intervention and now final military withdrawal, apparently after cutting a deal with the same group that they came to fight in 2001. The big difference in these two decades is the steady rise of another power that is less deferential to the American supremacy and is claiming its place in the sun- China. China and Pakistan have already decided to recognise the new regime in Kabul as it will facilitate the belt and road initiative of building a new silk route connecting the east with the west. India that has invested heavily in the people's welfare programmes in the country seems to be the big loser, at least for the moment.

But, even before the drawdown was completed on the 30 th night, a day ahead of schedule and Taliban is now the master of all it surveys, western media has already been talking about the unexploited riches that the country holds and that are ripe for exploitation. It is in that context that we examine in brief the phenomenon of resource curse that is normally associated with many resources rich developing countries where despite such resources, the vast majority of the people at large are desperately poor.

According to a report by the Natural Resources Governance Institute, certain types of natural resources, such as oil, mineral and gas because of their very nature of exploitation involving large upfront costs, long gestation period, volatility in commodity prices and secrecy involved, are different from other types of wealth and may as well lead to lack of democracy, theft and authoritarian rules. When government spending is dependent on taxes rather than such resources, the governments tend to become more answerable to the citizenry whereas if the governments that are less dependent on taxes, citizens also tend to neglect monitoring of government expenditure as is the case with some of the gulf countries.

Besides, some such countries may also spawn various rival groups that fight with each other to gain control of such resources and thereby perpetuating the conflict. Zaire is one of the most resource rich countries in Africa, yet it is riven by conflicts, war, bloodshed and economic misery. Other examples are the Niger delta, Iraq, Libya.

In the commodities market, there are periodic cycles of boom and bust. Some governments become too confident of the boom factor and may borrow extravagantly and not monitor their appropriate use leading to catastrophic consequences as noted in Nigeria and Venezuela.

The term ‘ resource curse' is also at times associated with what is known as the ‘ Dutch disease' . The term originated from the discovery of natural gas in the North Sea. There was over investment and over employment in these areas, leaving other sectors unattended that overall may lead to exchange crisis and inflation. Iran, Russia and Venezuela fall in this category.

Apart from these peculiarities, because of the huge investment required for the initial investments, the extractive industries are dominated by some multinationals, who practice predatory policies and unless the administration is careful and robust, very often only a small share of the profits remain in the country and the balance is salted away through mispricing and collusion of the rulers who acquire massive wealth in tax havens and the government is virtually captured by these interests. There are too many examples of such malaise all around the developing world and beyond. As a result, many organisations and non-profits have been working in this area- Publish what you pay is one such. There is also a transparency initiative of which ironically Afghanistan had become a member. The United Nations group of experts have been working on the extractives for a long time and has published a handbook on the taxation of extractive industries.

That Afghanistan possesses important mineral wealth is borne by history. Lapis Lazuli is known to have been extracted in the Badakhshan province since time immemorial. An interesting trivia coming out of this research is that during the height of the Indus Valley Civilization, there was a Harappan trading post at Shortughai established near the lapis mines near the Amu Darya in Afghanistan. The site was discovered by the French in 1976 and it is speculated that it was established to procure lapis lazuli, copper, tin and other minerals.

Thus, existence of rich mineral resources in Afghanistan is well known. However, most of these resources are still untapped and that is what is exciting for the Multinationals willing to take risk. It is not inevitable that Afghanistan will suffer from the resource curse but all depends on putting in place a stable government willing to work for its entire population. As has been pointed out, there are examples for countries having changed course after discovery of important resources- for example Australia, Mexico. One will have to see what course the new rulers of Afghanistan will take.

Coming to present times, according to a New York Times report in 2010, the United States had discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves consisting of iron, copper, cobalt, gold and industrial metals like lithium are so big and include so many minerals that are essential to modern industry. (https://www.nytimes.com/2010/06/14/world/asia/14minerals.html). It was reported that an internal Pentagon memo stated that Afghanistan could become the “Saudi Arabia of lithium ,” a key raw material in the manufacture of batteries for mobile phones, laptops and electric vehicles. The Lithium deposits are found in Herat and Nimroz. It was reported that Afghanistan's mineral wealth was discovered by a small team of Pentagon officials and American geologists.

Afghanistan apparently has a mining law drafted with the help of experts from the World Bank. The mining concessions were to be awarded on auction basis. But there were already complaints of corruption in awarding the copper concession to China Metallurgical Group that won the bidding for a copper mining project in Aybak, Samangan, Afghanistan. The NY Times article states that Afghanistan's minister of mines was accused by American officials of accepting a $30 million bribe to award China the rights to develop its copper mine.

According to a recent DW news item, a 2017 Afghan government report estimated that Kabul's new mineral wealth could be as high as $3 trillion , including fossil fuels. Lithium, as discussed earlier is used in rechargeable batteries and its demand is increasing. Post COVID, copper price has increased by 43% and that more than a quarter of Afghanistan's future mineral wealth could be realized by expanding copper mining activities.

Apart from copper and Lithium, what has excited western investors is the discovery of rare earths in Afghanistan. According to a Fraser Institute report, the importance of rare earth elements to the global economy cannot be overstated. (https://www.fraserinstitute.org/article/afghanistans-rare-earth-element-bonanza).

They are essential to the manufacture of cell phones, televisions, hybrid engines, computer components, lasers, batteries, fibre optics, and superconductors and that Congressional findings have called rare earth elements critical to national security . These elements apparently are key to the production of tank navigation systems, missile guidance systems, fighter jet engines, missile defence components, satellites, and military grade communications gear.

China is the world's leading producer (97%) of these elements. India has also some deposits but not very substantial. Its importance was highlighted by the Chinese action in limiting the production in order to manipulate the price. Besides, it had stopped supplying these materials to the Japanese customers following a maritime dispute. The discovery of these elements in Afghanistan could therefore provide an alternative source of supply for the western nations. The taking over of the administration by the Taliban has therefore put these nations in a bind.

Interestingly, the 2010 article in NY Times had presciently predicted a possible outcome of the discovery of the mineral resources in Afghanistan- a more determined and fierce fight by the Taliban to take control of the country- exactly what has happened today .

Of course, there is debate over the inevitability of the resource curse befalling Afghanistan. The Fraser Institute Article mentions that early studies on the resource curse overlooked the role of economic institutions and the interaction between natural resources and the quality of institutions and that nations with economic institutions of higher quality are more capable of managing their resource revenue. Quoting from the work of political scientists specializing in resource boom, the report mentions that roughly twice as many countries have been blessed by resource booms as cursed by them and gives example of Mexico that was also mired in factionalism and poverty.

As of now, however, it's still a pie in the sky and more than 70% of Afghanistan's budget comes from grants from the USA and its allies. All these have been frozen. There is speculation that China perhaps is ready to fill the void but the Chinese strategy so far has not been to give aid. Rather they would build infrastructure projects and put the recipient country in a debt trap. What strategy they will follow will be clear in the coming days. But Pakistan, the main enabler of the Taliban is celebrating big. Today itself the German Foreign Minister is meeting with his Pakistani counterpart.

Before concluding, we may notice in brief the tax system that was put in place in Afghanistan.

Afghanistan has an Income Tax Law of 2009 that replaced the earlier legislation adopted in 2005. There is a separate Tax Administration Law 2015 that was introduced to manage the affairs of the tax administration and to provide methods of collecting taxes as also setting out the rights and obligations of the taxpayers and the tax administration. The maximum personal income tax rate is 20%, dividends, interest, capital gains are also taxable at the same rate. More importantly, the corporate tax is also quite low at 20% and has remained unchanged for quite some time. There is also a Transfer pricing regulation in place.

In Afghanistan, the Personal Income Tax Rate is a tax collected from individuals and is imposed on different sources of income like labour, pensions, interest and dividends. Revenues from the Personal Income Tax Rate are an important source of income for the government of Afghanistan. There is a requirement of obtaining a Tax Identification number from the tax administration.The tax year in Afghanistan runs from March 21 – the first day of Haman – to March 20th, which is the last day of Hoot. The tax GDP ratio is roughly 9.5, which is not too bad. Apart from the personal income tax and corporate tax, there is also a business receipt tax which is calculated as follows:

Certain receipts were not subject to income tax and these included grants, gifts and award of the State, grants gifts and awards of foreign governments, international organisations and non-profit organisations for contributions to science, art, literature, social progress and international understanding, interest on bonds issued by the State and by municipalities.

A Value Added Tax was to be charged at 10% on the domestic supply of goods and services and was to replace the business receipts tax. But this has been postponed to 21 December, 2022. Taxpayers with annual turnover of AFN 150 million was supposed to register for VAT.

There is also a system of both public and Private Rulings by the Ministry through the Revenue Department. There is also a GAAR in place.

Afghanistan has been trying to have DTAAs with Pakistan, Iran and Turkey for some time now. At the moment, it does not have any such tax treaty in place.

Over the years, the Revenue Department has become sophisticated and guidance is available on most of the issues. That the revenue department was becoming assertive is apparent from the fact that it was ready to go for audit of some of the American and NATO sub-contractors.

It was reported very recently on May 5, 2021, that the Afghanistan-NATO Implementation Commission (ANIC) and the Joint Commission Executive Steering Committee agreed that the Afghan Government would drop all claims against defence contracts performed in Afghanistan . (https://www.jdsupra.com/legalnews/afghanistan-agrees-to-drop-all-tax-5981296/)

Diplomatic Note 202, of 2002, provided that "the United States, its military and civilian personnel, contractors and contractor personnel shall not be liable for any tax or other similar fees assessed within Afghanistan."

The NATO Status of Forces Agreement alsoprovided that contractors "shall not be liable to pay any tax or similar or related charges assessed by the Government of Afghanistan within the territory of Afghanistan on their activities, and associated income, relating to or on behalf of NATO Forces under a contract or subcontract with or in support of NATO Forces.

However, the Afghan Ministry of Finance had tried to tax some contractors arguing that only the prime contractors were tax-exempt and hence demanded taxes from sub-contractors. Besides, since in terms of various agreements, only those that were not normally residing in Afghanistan were to be exempt, there was conflict relating to the interpretation of the term normally resides and anyone residing in Afghanistan for more than 183 days was held to be resident in Afghanistan thereby being liable to tax in Afghanistan. It seems that the Revenue Department also tried to tax the dividends earned in Afghanistan arguing that dividend is not a tax on a corporate entity but rather on individuals. Besides, the ARD also tried to tax awards and bonuses arguing that these are not specifically included in the various agreements. All such arguments were however overruled by the agreement that was reached.It remains to be seen whether the new government will abide by these agreements.