The government of Kazakhstan is proposing to abolish mandatory pension contributions (OPVR) required from employers, which are set to take effect in 2024. Starting in 2025, the rate will be 2.5% of the wage fund. In exchange, entrepreneurs will be offered an increased VAT rate.
What can Kazakhs expect, and how will small and medium-sized businesses adapt to the new economic conditions? What does the future of pensions look like in Kazakhstan? Vira Kapatsina, head of the consulting services company Angels Niko Advisory, shares her insights in an interview with inbusiness.kz.
– Vira Ivanovna, how will the cancellation of mandatory pension contributions affect the financial state of employers? How do you think employers can adapt to the new conditions to maintain their competitiveness in the labor market?
– Let’s break down the process of increasing the VAT rate. Initially, there was a plan to raise the rate to 20%, but then a differentiated scale was proposed: a general rate of 16%, exemptions for agricultural producers, and an intermediate rate of 10% for certain categories of taxpayers. In the end, we have 16% as the main rate, along with exemptions and an intermediate rate of 10%. It is also likely that a zero rate will remain for certain transactions.
Thus, the overall VAT rate will be 16%, compared to the current rate of 12%. This indicates a planned increase of 4%. However, when discussing the impact of any tax, it is essential to consider not only its rate but also the tax base. The base is what the tax is calculated from. For instance, mandatory pension contributions from employers are levied on the wage fund, while VAT is calculated based on total sales volume.
It is crucial to understand that the bases for these taxes differ. The wage fund includes the amounts that the employer spends on paying their employees. If we talk about a 4% increase in VAT, it implies that the employer will have to raise prices for their products. For example, if the owner of a small bakery earns a million tenge a month, their wage fund will be significantly less than that amount.
It is incorrect to compare 4% on sales with 2.5% on the wage fund since the bases for calculating the taxes differ. The wage fund will always be less than the total sales volume. Therefore, the statement that the reduction in pension contributions is offset by the increase in VAT is not entirely accurate. The employer will need to raise prices due to the new VAT, which may negatively affect consumers’ purchasing power.
For instance, if the price of shoes increases from 100,000 tenge to 116,000 tenge, many consumers may forgo the purchase. Ultimately, the burden of VAT falls on consumers, as they pay this tax through increased prices for goods and services. There is also a misunderstanding of how this change will affect employers and their financial state.
In my opinion, a reduction in VAT will not alleviate the situation. Why? Because there is no direct link between VAT and the wage fund. For example, if the payroll tax is reduced by 2.5%, it does not mean that I will automatically lower my prices. I had a price of 116,000 tenge, and it may remain the same or even increase to 120,000 or 150,000 tenge. A reduction in payroll tax will not create a desire for me to lower my price.
Prices will rise, as they will reflect the higher VAT and increased costs for procuring goods and services. The wage fund will remain unchanged, and while I will pay less tax on it, this will not affect my prices. The employer will be unable to lower their price, and this brings us to the crux of the matter.
The real effect on the economy and consumers from the change in rates and the abolition of OPVR will be that with an increase in VAT, prices will automatically rise due to the increased tax burden. Additionally, the rise in prices will be driven by higher costs for raw materials, fuel, electricity, and utilities. Ultimately, the 2.5% from OPVR will not have a significant impact: firstly, the base for calculation is small; secondly, the amount is insignificant; and thirdly, the negative consequences of the VAT rate increase will outweigh any positive changes. I believe that this will be the case.
– How do you evaluate the proposal to increase the VAT rate as an alternative to mandatory pension contributions? What are the advantages and disadvantages of this approach? How could it affect consumer prices and the overall level of inflation in the country?
– Increasing the VAT rate will undoubtedly lead to a rise in prices for goods and services. Firstly, the tax itself will be higher, and secondly, there are not many producers in Kazakhstan who sell their products directly. More often than not, there are several intermediaries between the producer and the final consumer, and each of them will be forced to increase their prices by 4% due to the rate increase from 12% to 16%. Thus, the final consumer will face a multiple increase in prices.
Some argue that VAT is an indirect tax and does not affect business. But that is not entirely true. When I buy a product with VAT, I pay both for the product itself and for the tax. And if I previously paid 12%, now I will have to pay 16%. This means that the entire supply chain will be affected, and the final price for the consumer will rise.
Moreover, the increase in VAT will lead to a rise in the overall inflation level. State forecasts, which suggest 4.5% inflation, may be far from reality. In practice, considering current prices and expenses, actual inflation could be 25-30%. The government does not want to acknowledge this because it would then need to increase social benefits and payouts.
It is important to consider not only inflation but also the overall effect of the tax increase. If the VAT rate rises, the question arises: what resources will the final consumer have to purchase goods and services at the new prices? Each stage of the chain will add its own 4% plus its margin, further increasing the cost.
Thus, the increase in VAT will have a significant impact on the economy. Alternatives could only be comparable tax changes. For instance, if the VAT rate were reduced from 12% to 10%, it could provide real relief for businesses. However, raising the rate is not an alternative to mandatory pension contributions, as they are entirely different matters with different consequences.
– What economic consequences could arise from changes in tax policy for small and medium-sized businesses in Kazakhstan? Will this lead to an increase or decrease in entrepreneurial activity? How can small businesses adapt to the new conditions?
– Moving into the shadow or gray zone is becoming the only way for many to adapt. Either businesses must cover all tax expenses, which becomes very costly, or operate unofficially. I fear that small and medium-sized businesses will take any opportunity for unofficial work without much thought. Perhaps companies do not want to do this, but they are forced to because otherwise, their goods and services simply will not sell.
The government seems to not understand how this affects people's financial situations. A person may want to buy a product or service, but they simply do not have the money for it. If the price of a product is 200 tenge, and the buyer only has 100 tenge, they will not be able to make the purchase. As a result, gray schemes will actively develop, becoming the only way out for businesses.
This will lead to negative consequences, as an increase in entrepreneurial activity has never been accompanied by a rise in taxes. On the contrary, to stimulate development, it is necessary to reduce taxes, lessen control, impose moratoriums on tax audits, and conduct tax amnesties. When the government tightens control and raises taxes, expecting economic growth is simply impossible.
– What risks and drawbacks do you see in the proposed reform? Is there a likelihood of negative impacts on the social protection of citizens, especially vulnerable groups? How can the government mitigate these risks?
– Ultimately, all of this will lead to a decline in the standard of living among the population, and people will strive to buy only the cheapest goods. Enterprises will realize they cannot sell at reasonable prices and will begin to cut costs, seeking cheaper goods and services to lower their product prices. This, in turn, will negatively affect the overall level of development. The standard of living will also drop, as people will have less money for purchases. This means they will be able to buy less with the same amount of money than before.
Additionally, this will impact healthcare. A decline in social levels is always associated with a rise in morbidity. Illnesses require treatment, and for that, money is needed again. People either try to find paid medical services that are not accessible to everyone or turn to state institutions where the quality of services often leaves much to be desired. Therefore, when the government plans to increase taxes and introduce additional pension contributions (like OPVR in 2024), it must consider the impact of these measures on the