In mid-October, Kazakhstan’s government signaled a partial U-turn on a previously approved tax reform bill, in the hope of ensuring macroeconomic stability and reducing the negative impact of deregulated fuel prices and tariffs.
At the same time, the government still hopes to increase revenues to the tune of 3.7 trillion tenge ($6.9 billion) in the next year, as previously budgeted. However, due to recent changes, the budget may now be short of approximately 50-60 billion tenge (around $115 million).
Finance minister Madi Takiyev laid out the government’s plan to compensate for these losses by strengthening tax and customs collection in an interview with Vlast.
Why has the government decided to walk back its tax reforms? Why was a thorough analysis not previously carried out, taking into account the financial situation of small and medium businesses and the population at large?
The original draft of the new Tax Code only included basic rules. Everything else was left to the by-laws. We had to discuss more than a thousand specific rules, this is why the debate continued for so long. The Atameken National Chamber of Entrepreneurs cooperated with the private sector on this.
We carried out a wide-ranging analysis after having compiled extensive data on all entrepreneurs and we devised a fiscal-economic model. Plus, we published every decree on the e-government site to get feedback. There were lots of reviews, which allowed for revisions and allowed us to carry out a deeper analysis.
The government still plans to obtain increased budget revenues after raising the VAT rate. You said earlier that the removal of tax incentives, improved administration, and other measures alone would not have the same effect. Now, you argue that these measures are necessary. Why have you now changed your narrative? Why was this more complex solution initially rejected by the government bloc?
When we drafted the new Tax Code, we calculated a number of things. The first was an increase in the rate of VAT, the second was the removal of tax incentives, and the third was a review of the current tax regimes.
We predict that all this will allow us to collect an additional 3.7 trillion tenge. Thanks to this additional source of revenue, we will not be relying on so-called “targeted transfers” from the National Fund in 2026. We will still obtain 2.7 trillion tenge ($5 billion) in “guaranteed transfers.”
As you know, we have collected transfers from the National Fund in the region of 5 trillion tenge ($9.4 billion) every year since the [COVID-19] pandemic. Thanks to the current tax reforms, we will get rid of targeted transfers and therefore saving National Fund assets while at the same time stabilizing the budget. In addition to this, we are still working hard on the expenditure side of the budget.
Many things are currently being optimized. For example, the social component accounted for 41% of total expenditure in the previous budget structure. Next year, this will decrease to 38%. Of course there is still work to be done, but in principle we are on track as far as expenditures are concerned.
Why did the government cut social security expenditure by 3%?
Part of the package was moved from the budget–Guaranteed Free Medical Care–to the Compulsory Health Insurance system. Many programs of the ministry of labor have also been reviewed; for example, the Targeted Social Aid program (TSA).
Will the government continue to place focus on VAT and similar measures to address the budget deficit? Or will additional funding be required following the partial reversals to the planned tax reforms?
Additional sources of funding will not be required. Personal income tax and Social tax paid by employers go towards local budgets. These taxes are stable and are not affected by external economic factors.
VAT and corporate income tax are the current main sources of revenue for the national budget. And this is where external factors come into play. Now, we are in the middle of a perfect storm. Large companies are being required to improve their logistic chains, due to external geopolitical factors and global trends, including the closure of large markets. Lower revenues translate into decreasing corporate income tax contributions.
Just this year we are seeing a decrease among 132 of our exporters to the volume of 461 billion tenge ($863 million), largely due to increasing costs associated with supply chains.
But we have accounted for this in next year’s budget.
Are there any preliminary figures about the missed budget earnings from the latest amendments of the Tax Code?
In principle yes, but these calculations are still being worked on. I think it will be somewhere in the region of 50-60 billion tenge ($112 million).
How will you make up for this gap?
We will replace the missing revenues through improved tax and customs management. If we take the current year, already by 1 October the tax and customs administration will provide an additional 653 billion tenge ($1.2 billion) to the budget.
Do you think that the transfer of business-to-business companies into the general category of the tax regime will further the long-standing trend of rising goods and services prices? Companies which provide goods and services to the general public naturally have counterparts, who are currently being forced to raise prices. Surely this change in the supply chain will cause inflation?
We are indeed seeing this effect. When the new Tax Code was announced, prices expectedly increased. We do not expect this trend to carry on into next year, however, as we are already over the worst of it. According to September’s figures, inflation this year is at 12.9%. The VAT increase has already been factored in, and businesses have already reoriented to the changes. Therefore we don’t believe that prices will continue to rise.
Furthermore, the nature of VAT means that the more people there are paying VAT, the less VAT will cost [because of write-offs]. This is the benefit of having such an across-the-board tax; in our case, this is a cascading tax. The tax burden will not be as great as people think, if we have more people paying VAT.
In July you told Vlast that the government had no intention of increasing its external debt this year, but earlier this week $1.5 billion worth of Eurobonds were announced. To what extent was this accounted for? Does the government plan to significantly increase Kazakhstan’s external debt following the walkback on the planned tax reforms?
We are currently reviewing our strategy. Public debt overall comprises 33 trillion tenge ($62 billion) or around 22.2% of GDP. Our pre-established debt ceiling is 32% of GDP. Of the total debt, 76% comprises domestic loans, which were all taken out in order to pay off the deficit. The remaining 24% of public debt comprises external loans. These came primarily via International Financial Institutions to fund public infrastructure projects such as building roads, hospitals, etc.
As regards the Eurobonds, we believe that we are in good stead, and that this is the right instrument. In the past year we have placed bonds three times: $1.5 billion, $2.5 billion and again this week another $1.5 billion. And the most recent was also the most significant, because we achieved a yield of 4.412%, our lowest-ever to date. This is indicative of external investors’ faith in our markets. Somebody summarized it well yesterday: investors are putting their money on the line, therefore they must judge our situation to be favorable.
We have already showcased all of our new reforms, including those relating to the budget, taxation, and public procurement. The results of our bond placements show that the economy is developing well.
This $1.5 billion Eurobond is within the deficit limit. While we can borrow from either the internal or external market, given the current situation borrowing on the internal market has become costly. This is why we went for international markets.
Are you planning to substantially increase foreign debt?
No, we will not be significantly increasing foreign debt. On the contrary, we intend to decrease it and to do this we need to reduce the budget deficit. The smaller the deficit, the less we will be required to borrow, and the less we borrow, the smaller the debt will be. It is clear though, that our way forward is on the international market. I will say it again: This is a way to show Kazakhstan’s place in the world.
An edited version of this article was translated by William Stringer.
Sign up for our English-language newsletter.
Поддержите журналистику, которой доверяют.
