Companies are fragmenting their businesses to evade taxes: what are the government's thoughts on this issue?

During a government meeting, Deputy Prime Minister Serik Zhumangarin reported that today, revenue from VAT accounts for 25% of the state budget, as conveyed by inbusiness.kz.

According to him, a basic VAT rate of 16% is proposed, along with differentiation.

"The potential inflationary effect from tax increases will be short-term and will dissipate within a year. Additional inflation is expected to reach up to 3%. At the same time, it is anticipated that the proposed measures will lead to an increase in tax revenues of 4-5 trillion tenge annually. Specifically, for agricultural producers, we propose exempting them from VAT. Currently, peasant farms do not pay VAT, and we will maintain that. Legal entities, agricultural producers, currently pay 30% of the VAT due to the budget, which they will no longer have to pay. Thus, all products produced in Kazakhstan will be more competitive," Zhumangarin stated.

He emphasized that this would help reduce the budget's dependence on volatile oil revenues, strengthen the savings function of the National Fund, and finance priority state projects.

"A rate of 10%. We propose this for the healthcare sector. Who else will it apply to? This question requires further discussion. What other activities – we will gather all proposals, calculate, and jointly with experts and businesses, we will decide. Why will the differentiation be only 10%? This is related to the complexity of administration. Firstly, for businesses. Secondly, for tax authorities. When there are many rates, it complicates accounting, filing declarations, and leads to an accumulation of debit balances. To avoid this, we propose 16%, 10%, 0%, and exemptions," the minister explained.

At the same time, he added that currently only 4% of enterprises pay VAT.

"Many companies artificially split their businesses to avoid taxation. This undermines the tax system and hinders normal VAT accounting. Therefore, it is proposed to lower the registration threshold from 80 million tenge to 15 million tenge. Conditions are being created where the cost of splitting expenses will exceed the benefits from splitting. This will create equal conditions for businesses and prevent evasion schemes. In this regard, we are guided by international experience. In most developed and developing countries, the VAT threshold is either significantly lower or completely absent," he reported.

According to him, in Canada, Korea, Scandinavian countries, several Eastern European countries, and our closest neighbors – Russia, Uzbekistan, and Kyrgyzstan – the thresholds are lower than in Kazakhstan.

"The retail tax regime will also be revised. In general, we are keeping it. However, the income limit for this regime remains at 600 thousand MRP – which is 2.3 billion tenge per year. Restrictions on the number of employees are lifted. The wage fund is deducted if revenue from sales exceeds 100 million tenge per year. This will stimulate the formalization of salaries. We maintain a rate of 4% with the possibility of reducing it by 50% through local councils. A key condition is the reduction of types of activities and sales only in the B2C segment. The regime is called 'retail.' It must correspond to its name. Sales are only to the population," Zhumangarin emphasized.

Overall, this will help reduce dependence on the National Fund, lower the level of public debt, and direct additional resources towards developing infrastructure, the agro-industrial complex, the manufacturing industry, and defense.

It is worth noting that following criticism from President Kassym-Jomart Tokayev, the government proposed to differentiate VAT rates within the range of 16-10-0%.