During a meeting with representatives of domestic businesses, President Kassym-Jomart Tokayev instructed the government to reconsider the VAT rate and emphasized the need for differentiation. According to Dr. Vyacheslav Dodonov, Chief Researcher at the Institute of Economic Research, the President's statement reflects concerns raised by the business community and experts regarding the government's proposal to increase the VAT rate to 20%.
– President Tokayev described the proposed VAT rate as excessive. How do you interpret his statement?
– The government had proposed raising the VAT rate to 20%, a suggestion that was met with strong opposition from businesses and experts. Given that the current VAT rate is 12%, an increase to 20% would represent a two-thirds rise, which is a drastic jump. This is likely why the President deemed it excessive.
The primary reason for increasing VAT is to boost budget revenues, as VAT is the largest source of state income. Last year, VAT collections fell short of the target – only 5.2 trillion tenge was collected instead of the planned 5.8 trillion, an 11% shortfall. Meanwhile, this year’s budget expects VAT revenues to reach 6.5 trillion tenge, a 25% increase. However, given last year’s revenue decline, achieving this ambitious target without increasing the VAT rate will be challenging.
Logically, if VAT revenues need to rise by 25%, the tax rate should also increase by a similar proportion, bringing it to around 15%. However, the government also plans to reduce social taxes and make other fiscal adjustments, which will likely require additional revenue from VAT. Therefore, the new minimum rate could be at least 16%.
– The President called for a differentiated VAT rate. How could this impact different sectors of the economy, and what benefits could such an approach bring?
– A differentiated VAT rate is essential to mitigate price pressures caused by tax hikes. VAT is an indirect tax that gets incorporated into product prices, ultimately paid by consumers. Given that inflation is already accelerating, any tax reform must consider its potential impact on prices.
To minimize the burden on lower-income households, essential goods and agricultural products will likely benefit from lower VAT rates. The agricultural sector, in particular, might receive preferential treatment to prevent excessive food price inflation. However, since many components in production costs will still be subject to the higher VAT rate, some level of price increase will be unavoidable.
– The President stressed the importance of thorough analysis and a well-thought-out strategy before implementing VAT changes. What key factors should be considered to improve the tax system’s efficiency?
– More important than just increasing the VAT rate is ensuring broader compliance among businesses. The government should be cautious in expanding the number of VAT payers too aggressively.
For instance, there was a proposal to lower the VAT registration threshold from 78 million to 15 million tenge. Such a drastic reduction could significantly burden small and medium-sized businesses. A more balanced approach is needed to avoid stifling entrepreneurship.
Another critical issue is improving VAT administration. Currently, out of 138,000 registered VAT payers, only 88,000 actually pay the tax. The priority should be enforcing compliance among the remaining 50,000 non-payers rather than drastically lowering the registration threshold, which could push more businesses into the informal economy.
Finally, tax reforms must be implemented swiftly. If the decision-making process drags on for an entire year, the state could once again face revenue shortfalls, leading to further withdrawals from the National Fund. The 2024 budget already anticipates VAT revenues to grow by 25%, so delaying necessary adjustments could make it impossible to meet these targets. That said, any rate increase should be phased in gradually to ensure businesses can adapt smoothly.
