Kazakhstan: Expert Comments on Proposed VAT Increase

Kazakhstan is contemplating raising its Value Added Tax (VAT) from 12% to 20% and lowering the registration threshold from 78 to 15 million tenge to address its mounting budget crisis.

Economist Almas Chukin explains why this measure might be unavoidable despite its impact on citizens.

The country faces a significant fiscal challenge: in 2024, while government spending reached 23 trillion tenge, tax revenues only amounted to 12 trillion.

The National Fund, asset sales, and borrowing covered the shortfall. The outlook for 2025 appears even more challenging, with expenses projected at 25 trillion tenge against expected revenues of just 15 trillion.

We got into the National Fund well with Covid, and there was no other way out. We stopped working, and the expenses had to be covered somehow. Another problem is that these expenses grow automatically - the MCI changes, all payments tied to it are indexed. Now, against one's will, the state's obligations are growing by two trillion a year. And this does not include the impact of inflation, as a result of which all construction and other projects financed by the state come for budget adjustments since the money initially included in the budget is not enough,  Chukin explains.

The three main tax pillars are VAT, Corporate Income Tax (CIT), and Individual Income Tax (IIT).

VAT emerges as the most practical option.

As Chukin notes:

The budget rests on three pillars - VAT, CIT and IIT. CIT cannot be touched - it is essentially a fund for the development of companies, without profit there will be no investment and lending. IIT will not give anything special, there will be a lot of noise, but little sense. VAT is the most neutral tax from the point of view of business since it is a tax on consumption, and ultimately it is the people who pay it.

The proposed increase could raise consumer prices by approximately 8%.

However, Chukin puts this in perspective:

We experienced 20% inflation in 2023 - we were upset. In 2024, another 8% inflation was added to those twenty, and the exchange rate fell by 20% - we also got used to it. So, purely in terms of numbers, the change in VAT is not a catastrophe for the economy but a temporary brake.

He emphasizes that VAT serves as a redistribution mechanism:

When they make noise and shout about the government that is reaching into people's wallets, we must not forget that the government will not take this money for itself. It will return this money back to the population through government spending. The rich pay more, but usually receive less from the budget, since they go to state hospitals less often, do not receive benefits, and send their children to private schools.

For the tax increase to be effective, Chukin recommends three key reforms:

• Optimize government spending by reviewing expenditure necessity and improving procurement systems
• Reduce tax benefits, particularly in Special Economic Zones that show limited returns
• Improve tax administration, especially regarding VAT refunds for exporters, while maintaining international competitiveness

While raising VAT may help address immediate budget concerns, Chukin warns that its long-term effectiveness will be limited without fundamental reforms in public financial management.

Original Author: Alina Pak