An expanded government meeting discussed key changes in the tax system, the need to increase VAT, and ways to combat inflation. Economist Almas Chukin explained why the government resorted to such measures, what the outcomes might be, and how Kazakhstan can tackle economic challenges, as reported by Tengrinews.kz.
It should be noted that the government announced the necessity to raise the value-added tax (VAT) rate. The exact increase will be debated in Parliament, with a proposed rate ranging from 16 to 20 percent, up from the current 12. Furthermore, there are plans to lower the threshold for VAT registration from 78 million to 15 million tenge.
At the same time, it is proposed to reduce the burden on entrepreneurs' wage funds (WF). According to Deputy Prime Minister Zhumangarin, the burden on WF paid by businesses is about 40 percent, which affects the cost of goods.
"A Necessary Measure"
Almas Chukin believes that raising taxes is an unpleasant but essential measure for stabilizing the country's financial situation.
"Nobody likes tax increases. When the government takes your money, it's not a pleasant experience. In principle, we had prosperous years without any crises. Nevertheless, every year we withdrew 5 trillion from the National Fund to fill the budget gap. It became clear that this could not continue. It was calculated that by 2035 we would have no National Fund left - something had to be done. Therefore, raising taxes is a necessary measure. The most important thing is not to forget that we are not only correcting the budget but also stabilizing state finances. If the government does not meet its obligations, such as paying salaries to teachers and police officers, nothing good will come of it. This money doesn't exist in a vacuum. The additional tax collected will return to us, as the budget is spent on ourselves," he stated.
According to the expert, lowering the VAT registration threshold to 15 million tenge will primarily affect small and medium-sized businesses.
"If we set a 20 percent rate for everyone, while keeping a low rate for those who wish to use a different tax regime, along with a high threshold, then everyone will opt for the more advantageous option. Therefore, this measure will only apply to small businesses. About 80 percent of SMEs fall under the new threshold, while the remaining 20 percent, whose income exceeds this limit, will lose this opportunity and be forced to switch to the general taxation system," the expert explained.
On the Issue of Social Tax
President Kassym-Jomart Tokayev emphasized that the government must consider the interests of all regions and prevent any slowdown in their development. He paid special attention to the issue of social tax, noting that abrupt changes could deprive akims of financial incentives. The head of state instructed a thorough re-analysis of the situation and the proposal of a balanced solution.
According to Chukin, the social tax represents a significant burden on businesses.
"There is an important technical problem. The government proposed to raise VAT, but in recent years, due to a lack of funds for social programs, the social tax has been continuously increased. The social tax is collected from entrepreneurs, from the WF. This makes it very unpleasant. As a result, salaries become expensive for entrepreneurs. According to government calculations, the total burden on the WF amounts to 44 percent - meaning that to pay an employee 100 tenge, an employer has to give an additional 44 tenge. Therefore, it is difficult to raise salaries for people due to this significant burden," he emphasized.
The expert pointed out that one of the key problems is that the social tax constitutes a significant portion of local budget revenues.
"If it is abolished, we are effectively undermining the financial foundation of Almaty, Kostanay, and district centers. They will lose a significant income that they have collected from their budgets. At the same time, unlike the social tax, VAT goes to the republican budget, that is, to Astana," the economist added.
The Economic Euphoria of Previous Years
From 1995 to 2009, Kazakhstan reduced the VAT rate from 20 to 12 percent. As Chukin explained, at that time, the country could afford this due to economic growth accompanied by rising state revenues.
"There was economic euphoria, and there was political flirting during Nazarbayev's time. From 2004 onwards, state revenues sharply increased due to large oil projects and rising oil prices. Before that, oil prices were very low. The state had a lot of money, and it became generous. To stimulate economic growth, the income tax was lowered to 10 percent, and the unified VAT rate was lowered to 12, but nothing particularly good happened as a result.
Now there are some who start shouting: that 20 percent will kill business, everything will shut down. Nothing will shut down, no one will die. When they set it to 12 percent, we didn't see much new development. If they set it to 20 percent, this will primarily hit people's wallets, and we will feel it in the stores. If an iPad cost 1000 dollars, it will now cost an additional 200 dollars, and you will feel the difference of 80 dollars. Those who ate black caviar will switch to red caviar. Those who ate buckwheat will switch to pearl barley," Chukin added.
The main problem in implementing strict budget rules is that the government cannot stop expenditures, according to the economist.
"They invented budget rules to prevent taking more than a certain amount from the National Fund. Last year, there was a shortage of funds, so at the end of the year, they asked for more money from the National Fund and sold shares to themselves - moving money from one pocket to another. The National Fund bought shares from 'Samruk-Kazyna', and the money went into the budget. This is called hidden financing. Those who create the rules do not follow them," he stated.
The expert identified three key factors in the fight against inflation: developing production, enhancing competition, and stimulating imports. He emphasized that for effective price regulation, it is important not just to limit monetary circulation but to create conditions for economic growth.
"We need to help not with money but by removing unnecessary restrictions and allowing businesses to engage in production. Inflation arises because people have more money. The population is increasing, while supply is limited. If there aren’t enough apartments for everyone, prices will start to rise. Therefore, the main method of combating inflation is not to make people poorer. When the National Bank raises interest rates, it restricts the money supply, encouraging people to save their money in deposits instead of spending. This way, we reduce the amount of money and balance demand with supply, and inflation will stabilize. (...) I think the President meant that the National Bank can continue tightening the screws, but it will not fix inflation. The government should manage inflation more, not the National Bank," he emphasized.
Businesses Will Have the Opportunity to Raise Salaries
Almas Chukin suggested that the government's idea of reducing the tax burden on wage funds by abolishing the social tax and mandatory employer pension contributions could benefit the citizens of Kazakhstan.
"This will primarily help ordinary people, as businesses will have the opportunity to compensate and raise salaries, since the tax burden on wages will decrease. For wealthier individuals, this is not particularly important, as their main income comes not from salaries but from dividends and deposits. Thus, this is more of a populist measure," concluded the expert.
Earlier, Serik Zhumangarin outlined the timeline for when the government would determine the VAT rate.
It should be noted that at the expanded government meeting, Prime Minister Olzhas Bektenov stated that it is necessary to raise the VAT rate in Kazakhstan. The head of state supported the decision for reforms.
