Kazakhstan: VAT is the problem?
Talk about a drastic hike in the main consumption tax has precipitated a torrent of indignation. As ever, officials are floundering in their attempts to sell the public on their ideas.
Talk in Kazakhstan about plans to radically hike the value-added tax rate has gone down like a plate of sick.
The indignation is almost universal.
And the government has done itself few favours in rolling out the mooted policy in its trademark flat-footed style.
The idea of abandoning the present 12 percent VAT rate was floated last week by Prime Minister Olzhas Bektenov in a meeting with economists and business community representatives.
Bektenov couched this proposal as part of a broader strategy for boosting state revenues.
“[President Kassym-Jomart Tokayev] has tasked the government with restructuring the economy to strengthen the real sector. The proposed reforms are a key step toward sustainable growth. Tax and budget reforms will be effective tools for improving governance and driving economic development,” he said.
Local media, seemingly briefed on background by officials, then began circulating an eye-popping figure: 20 percent.
Less than one year ago, Tokayev told the Cabinet that even 16 percent might be a little too rich for the public to stomach.
“Experts justifiably make the argument that putting up VAT can increase inflation and the share of the shadow economy, as well as reduce the appeal of the country as a destination for investment,” he said.
But 2024 was a torrid year for Kazakhstan.
Weeks after Tokayev made those remarks, the country was stricken by floods of biblical proportions. Almost 100,000 people had to flee their homes, countless heads of livestock were drowned, hundreds of buildings were destroyed.
The government committed to digging deep into its finances to pay compensation to families, help rebuild destroyed homes, cover the cost of lost livestock, and assist debtors in deferring loan repayments.
All of this unfolded against the backdrop of persistent inflationary pressures. As if things were not bad enough, Kazakhstan fell short of its initial oil production forecast for 2024.
This has contributed to escalating budget deficit woes produced by rising government spending and lower-than-expected tax revenues. As the Kazakhstan Forbes news website reported last month, the deficit in October stood at 3.6 trillion tenge (almost $7 billion), up from 2.4 trillion tenge in 2022, The expectation is that it will soar to 4.1 trillion tenge this year.
Tax shortfalls are a major issue. Only 52 percent of planned tax revenues were collected in the first nine months of last year, thereby leaving a 2.5 trillion tenge shortfall. VAT collection, which makes up 44 percent of tax revenues, has been particularly weak.
In addition to raising the rate of VAT, the government is considering lower the registration threshold for VAT payments. At present, only businesses that make more than 78 million tenge ($150,000) per year have to register for and pay the tax. The government is thinking about lowering this threshold to 15 million tenge.
That level would affect even small corner kiosks and vegetable stands, Yerzhan Yesimkhanov, a lawyer and economics commentator, wrote on his Facebook page.
“If this change goes through, 80 percent of all individual entrepreneurs in the country will be forced to register as VAT payers. That means filing tax reports, issuing invoices to customers, and dealing with complex bookkeeping,” Yesimkhanov wrote. “You will either have to hire an accountant or outsource the work, and either way, it’s just more and more expenses.”
The knock-on effect on counter prices that this implies will spell doom for the government’s battle on inflation, which appeared over the New Year to have turned a corner.
Deputy Prime Minister Serik Zhumangarin defended the proposed VAT hike this week, casting it as part of a broader fiscal strategy to balance the government’s books while also reducing the burden on businesses by lowering payroll taxes.
“The two measures should offset each other. While there may be a slight increase in prices, we will index pensions and salaries to protect socially vulnerable groups from the impact,” he said.
On paper, the plan is neat and elegant. By allowing enterprises to hold onto more of their revenue, the private sector will flourish and create a more lucrative employment market.
“The goal is to break out of the cycle of endless social support and finally stimulate the real economy. We need high-quality, well-paying jobs, which are currently lacking. Once this reform takes effect, the system will balance itself,” Zhumangarin said.
Critics maintain the very opposite may occur. Greater demands from the taxman could see a resurgence in the health of the shadow economy, they warn.
Almas Chukin, an economist, wrote about what a good number of businesses in Kazakhstan now do to avoid paying their dues.
“Right now, large businesses are breaking themselves up into smaller companies with annual revenues under 78 million tenge, so as to qualify as small or medium enterprises. This way, they only pay 3 percent in taxes (1.5 percent income tax and a 1.5 percent social tax on revenue), thereby completely avoid paying VAT,” Chukin wrote on his Facebook account.
The situation is hardly ideal, but this proposed VAT sting may compel those companies to hide their business from the state altogether, the economist said.
As is often the case in Kazakhstan, part of the problem lies in how the authorities are choosing to lay out this policy – and any potential mitigations – before the public.
The 20 percent figure has already impressed itself in the minds of an appalled public, even though no official has explicitly stated that is the number the government is going with.
Aidarbek Khojanazarov, a member of Respublika, a party in the rubber-stamp parliament, speculated that 20 percent might just be an opening gambit.
“They may be asking for a lot so that we can bargain them down to something lower,” Khojanazarov said, adding that he was as much in the dark about the government’s intentions as anybody else.