Alternatives to increasing VAT: areas where Kazakhstan can save money.
In recent weeks, discussions surrounding tax reform in Kazakhstan have intensified, particularly following President Kasym-Zhomart Tokayev's statements on the need to find "optimal solutions." Experts believe that the new VAT rate of 16% may only be a temporary compromise, and the issue of future increases is likely to resurface. Specialists have proposed alternative methods for reducing the budget deficit, including optimizing state expenditures and enhancing customs administration, as reported by inbusiness.kz.
During an extended government meeting in January, Minister of National Economy Serik Zhumangarin suggested raising the VAT rate from 12% to 20%, cutting tax benefits, and lowering the threshold for mandatory VAT registration. However, a few weeks later, the president instructed the government to adopt a differentiated rate.
Currently, the government proposes to set the VAT at 16% and to implement a differentiated rate. If these changes are approved, producers of agricultural products will be exempted from paying VAT, while a reduced rate of 10% will be established for certain sectors.
Differentiated VAT Rate and Business Expectations
Partner at Dasco Consulting Group, Tahir Aslaliyev, noted that such an approach is widely used in many countries around the world. For instance, higher rates of 18-20% could be applied to high-income and speculative sectors, while preferential or zero rates may be applicable to state-priority sectors such as agriculture, oil and gas chemistry, and IT.
"A reduced VAT rate can be applied, perhaps, to those sectors that have growth potential and can become sources of economic growth for Kazakhstan itself. These include food products, oil and gas chemistry, and possibly reduced tax rates for small-scale automobile assembly, as well as for the creation of basic materials in the mining industry. Beyond the goods production sector, this could also work in the services sector. For instance, for creative sectors like cinemas, film production, and perhaps for IT services. In other words, services based on creativity and human knowledge should have a stimulating differentiation, namely, reduced VAT rates," the expert shared his opinion.
The General Director of AERC, Zhanibek Aigazin, also supports the differentiation of VAT rates but believes it is essential to consider the purchasing power of the population and the technical readiness of the tax system.
"In China, there is a three-tier VAT system – 6%, 9%, and 13% depending on the type of goods and services. Kazakhstan could also consider such an option, but the question is how prepared our tax system is for this," he noted.
Real Rate: 16% Instead of 20%?
Aigazin pointed out that raising the VAT to 20% will not resolve all of the country's budgetary issues as the government expects. Furthermore, lowering the tax payment threshold to 15 million tenge will alter the competitive landscape among entrepreneurs.
"Perhaps, for the budget, the 20% rate will somewhat address the issue. In the first year, there may be an increase in tax revenues. But in the following year, the economy will adjust to this rate. For instance, under equal conditions, tax revenues may actually decline. For example, if everyone is subject to VAT, naturally, everyone will start buying from each other, and all will begin to take credits for themselves," the expert stated.
According to Tahir Aslaliyev, the initially proposed 20% rate was intentionally inflated to leave room for negotiation. He believes that the government needs to establish a rate that will accomplish three key objectives:
- Reduce the reliance on transfers from the National Fund. Currently, the volume of withdrawals exceeds receipts, and under this approach, the fund could be depleted within 10-15 years.
- Decrease dependence on state debt. In Kazakhstan, a significant portion of borrowings is domestic and costly, as they are tied to the National Bank's base rate. This increases the burden on the budget.
- Form a development budget. In Kazakhstan, its share is 8-9%, while in developed countries it is at least 20%. These funds are necessary for infrastructure modernization, the construction of social institutions, and support for businesses.
Given the above goals, the government may, in Aslaliyev's opinion, adopt a VAT rate of 16%. However, this would only be a temporary measure.
"Under pressure from businesses and society, the government will likely settle on a 16% rate. But this may prove insufficient, and in 2-3 years, the issue will be revisited. If our tax revenues, let's say, are inadequate to address the three tasks I mentioned earlier, then, accordingly, the VAT rate will likely need to be raised, perhaps from 16% to 18%," he suggested.
Optimizing Expenditures: Where Can We Save?
Initially, the Ministry of National Economy projected that raising the VAT rate to 20% would lead to an increase in tax revenues of 6-7 trillion tenge. However, experts believe this figure may be overstated. In particular, changes to the VAT threshold and a decrease in the number of activities subject to retail tax could reduce actual budget receipts to 3-3.5 trillion tenge, which is clearly insufficient to cover a budget deficit of 10 trillion tenge.
Therefore, in light of the president's recent remarks, the government needs to reassess not only the tax system but also budgetary expenditures. Aslaliyev proposed two key areas for savings: rigorous assessment of the appropriateness of budget expenditures; and increasing the efficiency of state procurement and government support.
According to Aslaliyev, there are many forms of government support that are ineffective and require reassessment. This, in turn, will help optimize the budget and reduce the need for tax increases.
In turn, Zhanibek Aigazin believes that optimization is also possible within the public administration system.
"About 14% of the budget goes to salaries of civil servants. There may be reserves for savings here. Additionally, it is necessary to analyze non-sequestered expenditures on social security, healthcare, and education: what functions can be transferred to the market or digitized?" he suggested.
Another way to reduce the budget's dependence on VAT is to strengthen customs administration. This will help increase tax revenues from foreign trade. Additionally, there are non-tax revenues, such as dividends from state-owned companies and income from foreign exchange reserves. However, these are unstable and depend on external factors, such as oil prices.
"In addition to tax revenues, there are also non-tax revenues. Among them, there are two main sources, but they are both quite volatile. The first is dividends from state enterprises. Essentially, the backbone of this comes from "Samruk-Kazyna," with revenues from "KazMunayGas," which, in turn, is heavily reliant on global oil prices. Consequently, when global oil prices are low, the share of non-tax revenues in the form of dividends decreases, leading to a shortfall in the budget," the expert explained.
In conclusion, it can be stated that the increase in the VAT rate is an inevitability and a new reality that we must navigate. We can only hope that the authorities will find a compromise solution that will be comfortable for both businesses and the state budget, as well as for the people of Kazakhstan. It is also worth remembering that the sustainability of the budget depends not only on the tax burden but also on the efficiency of government expenditures.