Economists discuss proposal to introduce tax on interest income from bank deposits in Uzbekistan

The Institute of Fiscal Analysis at the Ministry of Economy and Finance put forward the initiative to tax the interest income of individuals on bank deposits at a rate of 5%. According to the calculations of the authors of this proposal, it could bring about 1.4 trillion sums annually to the budget. However, at the moment, this is only an analytical hypothesis, not an approved bill, while interest on individual deposits remains exempt from income tax.

Risks associated with introducing the tax

Experts commenting on this initiative have highlighted a number of potential risks. It is proposed to withhold the tax from the nominal interest income, ignoring inflation, which may contradict the monetary policy of the Central Bank. Furthermore, such a measure can undermine confidence in the banking system and prompt depositors to transfer savings to other assets, such as gold, real estate, foreign currency, or cash.

Botir Kobilov, a professor at the University of Texas in Dallas (USA), called the idea theoretically sound but strongly recommended extreme caution in the current conditions of Uzbekistan. He noted that the tax, according to the proposal, is levied on the full nominal amount of the income, not on the real capital gain. Kobilov explained that most of the interest merely compensates for the loss of purchasing power due to inflation.

With a deposit rate of approximately 16% and inflation within 6–7%, the depositor's real income is about 9%. Nevertheless, the 5% tax will be applied to all accrued 16%, not just the real income. This problem is exacerbated when inflation rises to 15%, where a 16% deposit barely yields a real return, but the tax still has to be paid.

The economist also pointed out the conflict with the Central Bank's policy, which supports high rates to combat inflation and stimulate savings. The simultaneous introduction of a tax could create opposition between these two directions. To maintain a net yield of 16%, the bank would have to raise the nominal rate to approximately 16.8%, which would increase the cost of attracting funds and lead to higher loan costs. Thus, the tax would indirectly fall on the depositor, the entrepreneur receiving a loan, families taking out mortgages, and ordinary consumers.

In Kobilov's opinion, the psychological impact of the initiative may exceed its direct financial effect. Although a reduction in net yield from 16% to 15.2% may seem insignificant, ordinary depositors might perceive it as the beginning of taxing money held in the bank. There is also a risk of distorted information spread on social networks, where the perception may arise that the state is 'taking 5% from deposits,' even though the tax applies only to interest income, not the principal amount.

Kobilov also criticized the estimate of potential budget revenues of 1.4 trillion sums as overly simplistic. This calculation is likely based on a static model that does not account for changes in depositor and bank behavior. In practice, a slowdown in deposit growth, refusal to renew deposits, and transfer of funds to foreign currency or other assets could significantly change the picture. He concluded that 1.4 trillion sums is merely an accounting figure, not a real net income, because adjustments in people's and banks' behavior are constantly occurring in the economy.

Another risk is related to the reduced attractiveness of savings in the national currency. Since high rates on sum deposits currently compensate for inflationary and currency risks, removing part of this compensation through tax could push new savings into dollars, gold, cash, or informal assets. Kobilov emphasized that the main issue is not the size of 5%, but that the state might start taxing public trust in the sum.

Tax system that punishes investment

Behzod Khoshimov viewed this initiative in the broader context of tax policy. In his opinion, the key problem is not the rate itself, but the choice of the taxable object. The existing system often taxes funds at an early stage of investment, rather than the final net income or consumption. He compared this to taxing seeds instead of the harvest.

A similar situation occurs with corporate profit taxation, where capital expenditures for business expansion and new equipment cannot be fully accounted for immediately but are accounted for gradually through depreciation. This increases the cost of an entrepreneur's attempts to develop their business from a tax perspective. Individuals face a similar problem: homeowners pay tax on rental income, but repair and maintenance costs for the property cannot always be accounted for in the tax base. Khoshimov noted that the system does not recognize investment because the funds directed towards it are taken from income that has already been taxed but is not accounted for in the rent tax.

In his view, this makes current consumption more profitable compared to investing and saving. He insists that reforms should focus not on changing rates, but on correctly defining the tax base. Tax should be levied on net income after deducting confirmed expenses related to earning that income. Khoshimov suggested, for example, levying 12% on rental income while allowing for the deduction of documented expenses, which is equivalent to the principle of 'tax on the harvest, not on the seeds.'

Consumption taxation

Behzod Khoshimov also added that a well-structured tax system should primarily tax consumption, not savings or reinvested income. If a person receives interest on a deposit and immediately directs that money to new investments, such income should not be taxed. Tax should only be levied when funds are used to purchase goods and services. He pointed out that VAT is an example of a successful tax because it is applied at the point of consumption, not at the stage of capital accumulation.

Impact on depositors and banks

Behzodhon Alikhanov, an assistant lecturer at Harvard University, noted that a 5% tax is unlikely to cause a mass closure of deposits, but it may slow down the inflow of new savings into the banking system. It is important to consider that deposit yields are already declining: the weighted average rate for sum deposits up to one year fell from 20.8% in January 2025 to 16.6% in June 2026, a drop of 4.2 percentage points. After the introduction of the tax, the net yield of such a deposit will be about 15.8%, and with 7% inflation—approximately 8.2% in real terms. Further declines in rates combined with the tax could intensify the outflow of savings into foreign currency, gold, and real estate.

Although the volume of individual deposits reached 178 trillion sums by June 2026, this accounts for only about 9% of GDP. For comparison, in other countries, the share of household deposits is significantly higher: about 17% of GDP in Kazakhstan, 22% in Georgia, 29% in Armenia, 50% in Czechia, 63% in the UK, and 93% in Japan. Therefore, Alikhanov believes that government policy should focus on strengthening public trust in the banking system.

The combination of the previously introduced limit on state guarantees for deposits over 200 million sums, falling market rates, and possible interest taxation may worsen the balance of yield and risk for the depositor. Banks will also feel the consequences, as public funds constitute 38–39% of all deposits and about one-fifth of the banking system's liabilities. With a slowdown in deposit inflow, banks may raise deposit rates to compensate for the tax, which will reduce their margin and lead to higher loan costs, or seek more expensive sources of financing. Private and digital banks, which are heavily reliant on retail deposits, are most vulnerable. Ultimately, the actual burden of the tax will be distributed among depositors, banks, and borrowers.

Alikhanov also noted that the expected fiscal effect remains small: the stated 1.4 trillion sums constitutes less than 0.3% of consolidated budget revenues, and this estimate does not account for changes in market participant behavior. In his opinion, introducing a tax on interest income now is unwarranted; a more significant effect can be found in revising preferential lending programs, which create imbalances and cost the economy more.

Position of the Institute of Fiscal Analysis

Following public discussion, the Institute of Fiscal Analysis clarified that this idea is the result of scientific and analytical research conducted by the institution's staff. It was presented at the 'Fiscal Dialogue' event for professional discussion among experts and specialists and does not have the status of an official decision, document, or bill. The proposal does not entail any changes to current legislation, and amendments to the Tax Code can only be made after review by relevant state bodies with the participation of the public and experts. The Institute confirmed that interest income of individuals on bank deposits remains exempt from tax, and the proposed rate corresponds to the dividend tax rate and applies only to the interest income, not to the principal amount of the deposit, for the purpose of scientifically assessing the possibilities of a fairer system.