Unfulfilled Expectations
The results of 2024 turned out to be worse than anticipated. The GDP grew by 4.8% in 2024 against a target of 5.3% and a goal of 6%. Inflation exceeded the target range of 6-8%, reaching 8.5%. Investments decreased by 30%, and the tenge weakened against the US dollar by 20% over the year, with a 10% drop occurring just in December. The National Bank had to conduct currency interventions again and reinstated the mandatory sale of 50% of foreign currency earnings for state-owned companies.
A budget crisis erupted: only 80% of the planned tax revenue was collected, and a deficit of 2 trillion tenge had to be covered from the National Fund.
The dynamics of economic growth are insufficient, acknowledged Kazakhstan's Prime Minister Olzhas Bektenov. The electricity and heat energy sectors, water management, gas transportation system, roads, engineering networks, and infrastructure remain underfunded.
However, the president stated that, "no matter how hard it is, the government must ensure total savings, tighten belts, and live within its means."
The growth factors that benefited Kazakhstan since the early 2000s—significant foreign investments in oil and metal extraction and processing, as well as the construction of Astana—are now almost ineffective.
Tokayev reminded that "over the nine months of the previous year, the volume of direct foreign investments amounted to $12.7 billion, which is 36% less than the investments during the same period in 2023." The government needs to enhance its efforts to attract investments, especially in projects based on promising methods and processes aimed at external markets—typically offered by foreign investors.
Therefore, it is necessary to "move to a new level of cooperation with neighboring countries" in industry, transport and logistics, IT sector, and agriculture, while "keeping a close watch" on the development of major investment projects with China, Russia, the USA, EU countries, the Middle East, and Asia. Key growth areas in Kazakhstan should include tourism, agriculture, and energy, including nuclear energy. The conversation now revolves around the construction of three nuclear power plants.
The Essence of Budget and Tax Reform
The government intends to address issues through budget consolidation and digitalization, including control over social spending. The budget and tax reform should increase revenue, change the economy, and expand the state’s investment base. The draft Tax Code, which has long been discussed in parliament, is based on a fivefold reduction in the VAT threshold for companies and an increase in the rate from 12% to 20%. Shifting the tax burden from payroll to sales "will enhance the competitiveness of enterprises, create necessary financial reserves for them," "allow businesses to increase employee salaries," and provide an additional 5-7 trillion tenge to the budget, said Kazakhstan's Deputy Prime Minister for National Economy Serik Jumangarin.
The market for socially significant food products is inelastic. Consumers will not turn away from it. In this sector, producers will undoubtedly pass on the VAT increase to consumers, knowing that they have no alternative, he explained to journalists at a meeting in Almaty.
Conversely, in the non-food sector: if producers pass everything onto consumers, since the market there is elastic, consumers will vote with their feet. They will buy imported pants or shoes from producers outside our country. There, the tax burden is likely to be shared between production and consumption.
“We take all these factors into account. Currently, we have 137,000 VAT payers. In reality, 88,000 out of 2.3 million are paying. That’s only 4%,” he said.
As a result, most of those who pay VAT purchase components and goods from those who are under preferential regimes and do not pay VAT. Consequently, when they sell the goods they produce, they are forced to remit 12% VAT to the budget.
However, the essence of VAT is different. VAT is a credit tax. It is indirect. You receive VAT from someone when purchasing goods from them, then you create your goods with a certain markup, generating another VAT that you charge further down the chain, and you pay the difference between the two taxes: the tax you previously paid is deducted, and the tax you charge is added. The difference between them is, on average, 4-5%, notes the Deputy Prime Minister.
Therefore, increasing VAT from 12% to, say, 20% imposes a burden on the enterprise, averaging a maximum of 4%, shifting from retail tax, where you must pay the entire amount, to credit tax, where you pay through the chain. It does not create a significant burden on the enterprise.
However, "reducing the burden on the payroll has two consequences:
- the employer can reduce the payroll by that amount, saving money, or they can maintain that payroll and then
- employee salaries will increase. We will encourage employers to choose the latter. At least, with the main employers,” Jumangarin promised.
Thus, this reform is a “major fiscal maneuver that will primarily help to legitimize our economy, increase tax collection,” but overall, it will enhance the competitiveness of our products and shift the tax burden from the production sector to the consumption sector.
At the same time, especially socially vulnerable groups may suffer. There will likely be significant problems in the budget sector. The poor should not feel this reform. This is similar to the current reform in the housing and communal services sector: everyone who cannot pay the new tariff will be provided with housing assistance. Targeted assistance. Salaries will be indexed. Moreover, within the framework of this reform, the government wants to significantly increase salaries for doctors and teachers to raise the prestige of these professions, so that we do not build schools without teachers or hospitals without doctors.
Most importantly, "we want to increase the development budget by 2.5 times, which currently stands at 8% of GDP. We aim to make it 20%. In the 2026 budget, the development budget is not even 8%, but 6%. If the tax reform is supported, we will present a development budget of 20% to parliament on September 1."
The development budget will primarily be directed towards infrastructure, roads, development institutions, and macro-development of Kazakhstan.
“The Agricultural Credit Corporation and KazAgroFinance aim to at least double their funding. The budget for national defense will also be at least doubled,” Jumangarin stated.
This is the essence of the reform, concluded the Deputy Prime Minister.
The Devil is in the Details
VAT will not be 20% for all sectors of the economy; for the agricultural sector, it will remain zero, said Deputy Prime Minister Serik Jumangarin while "revealing details of the budget and tax reform" to journalists during a meeting in Almaty last Saturday.
"VAT will not increase, even if it reaches 20%, this is currently a matter of discussion. VAT will not be 20% for all sectors of the economy; for the agricultural sector that feeds Kazakhstan, VAT 'was and will remain zero.' It is too early to introduce taxes in this sector; we first need to strengthen our own processing industry. In about two years, after establishing milk processing and poultry production, Kazakhstan, according to his data, will be able to fully supply the population with all types of products," Jumangarin believes.
“And that’s it. (…) After that, we can talk about reform in the sector, setting reciprocal obligations. Most likely, there will be no VAT in the food production sector. At most, it will be the current VAT, or we may even reduce it to ensure that this sector operates. We might even reduce it to around 5%,” the Deputy Prime Minister added.
Most likely, there will not be such an increase in the pharmaceutical industry. At most, around 5%, believes Jumangarin. In housing construction, "we will most likely implement an infrastructure fee that the construction enterprise will pay. Currently up to $50 per square meter, up to $60. We won’t be inventing new taxes. We are discussing these issues now, depending on the class of housing," Jumangarin stated.
According to him, there probably won’t be an increase in VAT for housing because there is a shortage of housing. Instead, the sector will be legitimized so that a separate LLP does not open for each residential complex, and the company will be responsible for its construction.
Comments on VAT for SMEs are Laced with Skepticism
Experts and businesses view the government’s proposals with skepticism. On social media, entrepreneurs express pessimistic assessments regarding the government's intention to raise the VAT rate from 12% to 20% and lower the VAT registration threshold from 78 million to 15 million tenge.
- We are developing shock scenarios for the VAT increase. Since we do not have credit VAT, we are working on raising prices in the near future and laying off less productive employees, writes Maxim Barychev, founder of the "Uchot" group of companies on social media.
- I have yet to hear the opinion of those who actually