The replacement of the value added tax with the sales charges can cause new problems for Kazakhstani businessmen, mainly for small business entities. This is an opinion of a counsel of GRATA Law Firm – Yerkin Sagiyev, as reported by LS.

The expert explains: “In Kazakhstan, VAT is paid mainly by medium and large business entities. The introduction of the sales tax (ST) involves payments from small business entities as well.”

“There will be great difficulties. Since early 2000, a simplified tax regime for them involves the rate redustion from 13% to 3%. Such a change was made in the budget-friendly period and reasoned by stimulation of business activities,” reminded Mr Sagiyev.

The counsel believes that the additions to the existing rate can cause a strong negative reaction from small business entities.

“Alternatively, the Ministry of Finance may try to exclude from the ST payers those taxpayers, which enjoy a simplified regimes. However, such a step will have a stronger impact on the decrease in collection of the new tax,” said the lawyer.

Mr Sagiyev also explained the difference between VAT and ST. According to the expert, they play the same role – taxation of consumption expenditure, however the procedure is different.

He says that VAT is collected in parts from all enterprises, which engage in the production and sale of goods or services. While ST is charged in full at the stage of retail sales.

“VAT in Kazakhstan is paid by the majority of taxpayers. Many of them are large importers, manufacturers and wholesale distributors. It is hard for them to work in the sidelines. Even if the retail sector still remains uncontrolled by the tax authorities, part of the funds will in any case collected. This is a serious argument in favour of VAT. As late as 2014, over 70% of VAT was collected at the stage of goods import,” said Mr Sagiyev.

The firm’s counsel believes that in some cases, VAT existing in Kazakhstan cannot operate without refund from the budget. This position, according to the expert, is a serious vulnerability, which has been for many years used for unauthorised withdrawal of money from the treasury.

At the same time, the lawyer explained that ST has mirrored features. This kind of tax does not provide for a refund from the budget, and this problem will be solved radically.

“However, ST will not be payable by right-minded taxpayers, except for some large retail chains. ST will be collected from many small retailers that traditionally show a high level of tax evasion. Replacing one tax with another, the Ministry of Finance, in fact, changes one problem to another. The issue is whether the State Revenue Committee will manage new challenges?” Mr Sagiyev said.

If Kazakhstan replaces VAT with ST, then as estimated by Mr Sagiyev, the tax rates may drop below 12%. According to him, this is mainly due to the psychological effect.

“To convince marginalised retailers to voluntarily give 12% of proceeds to the budget will be a great challenge. At the same time, a significant reduction of the rate will probably reduce tax revenues. Given that VAT revenues make a quarter of all tax revenues to the state budget, the failed reforming thereof will bring them down,” predicts the lawyer.

GRATA representative believes that the Ministry of Finance will only run such a risk, when it relies on the stimulating effect of the low rates. The expert noted, that in 2007-2008, when the issue was seriously discussed for the first time, the rates discussed were ranged between 5 and 7%. According to Mr Sagiyev, this time the same option will be considered.

As earlier reported by LS, the President of the Republic of Kazakhstan – Nursultan Nazarbayev, stated the need to replace the value added tax with the sales tax. LS interviewed experts on how the measure would affect the tax area of the country.

© LS Financial Magazine