Kazakhstan macro: Budget revenues grow YoY but not enough, prompting tax reform
We recently mentioned that the republican budget accumulated about 15.1% of annually planned tax revenues in 2M25, which looks like an improvement compared with January, when the authorities collected only 5.1% of the annual plan. However, things still don’t look very reassuring as some taxes are collected on a quarterly basis, and February is a month of quarterly tax payments (along with May, August, and November). Hence, tax collection will likely be behind schedule again in 1Q25 as a whole. This year is set to be another year of insufficient tax collection.
In the current environment, the Kazakh government announced sweeping reforms to the tax system. One of the key proposals is to raise the general VAT level to 16% from the current 12%. However, some segments of the economy may enjoy a reduced VAT (10% for healthcare, possibly IT, and some others, and 0% for agriculture). Current regulations assume that companies with an annual turnover not exceeding KZT80 mln (i.e., about $150K) do not have to pay VAT. Some studies suggest that many Kazakh companies avoid paying the VAT by splitting larger businesses into a number of smaller ones as a way to evade paying this tax. The government proposed to reduce this threshold to KZT15 mln, implying that a $30K annual turnover becomes a benchmark (assuming that splitting larger businesses further into much smaller ones would be more costly than paying VAT).
The fact that the government decided to eliminate various loopholes in the legislation that allow not paying the VAT seems reasonable. Hiking the VAT and offering different rates and exemptions is a more questionable idea. Higher VAT rates may somehow dry up tax revenue flow to the local budgets. It is worth reminding that discussions about insufficient revenues emerged after 2022, when republican budget expenditures were explosively amended, and the same occurred in 2023-2024 (albeit on a smaller scale). This spending generates high inflation, forces the government to actively intervene in the FX market, and creates more distortions associated with the exchange rate. Interestingly, before these changes on the expenditure side, the current tax arrangements looked good enough as they allowed not only the smooth running of the country’s budget, but also the accumulation of reserves in the National Fund. In recent years these reserves have stopped growing amid escalated spending.
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