Tax burden in Kazakhstan
Janat Berdalina, Managing Partner, KPMG, Kazakhstan
Aigul Mustapaeva, Supervisor, KPMG, Kazakhstan
Since the tax system takes an important place in financial regulation of macroeconomics, one of the main directions of state fiscal policy is improving tax legislation and tax administration practices. This policy has peculiarities depending on particular historical considerations. At the same time, each state tends to optimize the tax burden, which is primarily characterized by balance between state and taxpayers’ interests.
Many economists tend to use the so-called Laffer curve for calculation of the optimum tax burden. The curve reflects the parabolic relationship between the tax revenues and rates. Modeling based on the analysis of tax revenues in many countries gives the critical tax rate (40-50%) at which the tax revenue reaches its maximum value. Higher rates discourage entrepreneurship, and business sharply goes down creating a strong stimulus to development of the gray economy.
In practice, the level of relative tax burden differs greatly from state to state. The ratio of tax revenue to GDP is often used to make comparisons. Although this indicator is the method used for comparing tax burden in different states, it is necessary to take account of the fact that the real tax burden of a state depends on the peculiarities of its tax system, its quality of tax administration, and the existing tax culture (table 1).
According to these data, the relative tax burden in Kazakhstan is one of the world’s lowest in comparison with other countries.
Comparing the structure of tax revenue by countries, it may be noted that corporate income tax plays a major role in the tax structure of Kazakhstan, and the share of individual income tax revenue is small. In the OECD countries the situation differs radically: individual income tax is almost one third of all tax revenues, and corporate income tax is less than one tenth.
This is associated with the fact, that large-scale enterprises play the dominant role in the economy of Kazakhstan. For example, 100 of the largest taxpayers—a list of which was published by the Ministry of State Revenue—provided 45-52% of all the tax revenues in 1999-2001. Many foreign countries rely on small and medium-size businesses, on which the individual income tax is usually levied. International practice shows the high potential of small businesses in terms of revenue volume, revenue from employee income, and tax revenue (table 2).
This article aims to summarize the available data on the structure of tax revenue to the state budget over the last few years, and to compare the changes in the tax burden on enterprises operating in different economic sectors in Kazakhstan.
These data show that corporate tax revenue, social security tax, and VAT make up a significant part of state tax revenues.
Determining tax burden indicators by sectors of economy
The mining, metallurgy, food, transport and communications enterprises were selected for analysis, as were banks and institutions effecting certain kinds of bank transactions, since they have a significant share in the national GDP and contribute greatly to the budget. For example, in 2001 the mining enterprises provided 33% of tax revenue, processing industry 15%, transport and communications 12%, and banks and finance institutions 2%.
The structure of tax revenues in 2001, by economic sector
GDP, the ultimate indicator of a country’s economic activity, is the sum of gross added value by sectors. Therefore, to estimate tax burden on enterprises in these sectors, we have calculated and analyzed the indicator, which characterizes tax burden: share of tax revenue in added value by sectors of industry (tabl 3).
Indicators in the mining industry are most comparable with indicators in processing industry, since their added values are roughly equal, however the tax burden on mining industry is double the burden on the processing industry.
Enterprises in the industry provide one third of state tax revenue and are leaders in terms of share of tax burden on added value. In 1999-2001 the tax burden on the added value in this sector rose from 27% to 48% (table 4).
The large share of corporate income tax and its growth in the tax revenue structure of mining enterprises is due to an increase in world prices for their products, and in their profitability. According to data from the Statistical Agency, the profitability of the oil industry grew from –7.9% in 1998 to 49.2% in 2000, and aggregate annual income for this period grew from –4,264,400 tenge to 246,688,000 tenge.
In compliance with the current legislation, exports are subject to a zero VAT rate, and the exporter has the right to a refund of VAT paid on previously purchased goods and services. Since mining industry exports are increasing, the share of VAT to be refunded from the budget is also increasing. Therefore the share of VAT on domestic products in the taxes paid by mining enterprises has fallen substantially (from 10% in 1999 to -1% for the first ten months of 2002).
Besides general taxes, mining enterprises pay taxes for using natural resources. The share of special taxes and subsoil use payments is quite high (in 2001 the share of royalties, bonuses and other payments for using natural resources formed 18% of the total taxes paid by subsoil users).
The royalty rate under hydrocarbon production contracts is determined using a sliding scale in accordance with the accumulated volume of production. Many oil-producing enterprises have achieved the production level, above which royalty rates are increased. This explains the doubling of royalty payments in 2001 against 2000. Taking into account the progressive rates of special taxes for using natural resources, it is most probable that the tax burden of the mining industry will tend to increase in future.
Processing includes enterprises engaged in metallurgy, food, textile, oil refining, chemical and other industries.
The tax burden on metallurgy is significantly lower than on other industries and the processing industry as a whole. In 2001 the share of taxes in the added value of the metallurgic industry was 20%, which is lower than the processing industry average (25%).
Comparing these data with similar indicators in Russia, the conclusion can be made that that country has a similar ratio.
Tax burden on added value for Russian ferrous and non-ferrous metallurgy is the lowest in industry (11%): in the machinery construction and metalworking industries the figure is 28% (table 5).
On the whole, the tax revenue structure did not change during the period under review. This testifies to a reasonably stable tax regime for the metallurgy industry.
The following point should be noted regarding VAT. Metallurgy industry production is export-oriented. Therefore, when analyzing VAT data, the exporters’ right to a refund of tax revenue on zero-rated goods and services, bought and used for turnover tasks should be taken into account. The influence of this factor is confirmed by statistical data showing an excess of tax refunding over duty to be paid by enterprises in this industry. For this reason we do not examine VAT in the overall tax burden structure.
Coke industry, oil refining, and nuclear material production and processing enterprises
When reviewing the tax burden on the processing industry, we cannot avoid focusing on the coke industry, oil refining, and nuclear material production and processing enterprises, since this is the sector where a significant decrease in tax burden as a whole has been observed (from 48% to 31% in 1999-2001). (table 6).
It is clear that the reason for the decrease in the tax burden was a reduction in the share of corporate income tax and VAT. In respect of other taxes it should be noted that the share of excise in the tax burden structure is growing significantly.
In 1999-2001, the tax burden on the food industry did not change significantly, staying at a rather high level of 35%-37% of tax in added value. In Russia in 2001, the corresponding indicator was 41% and was second only to the tax burden on the fuel industry (44%) (table 7).
The food industry includes the following sectors: foodstuffs, alcoholic beverages, and tobacco goods production. It should be noted that there are special features in the taxation of each of these sectors.
Excise and customs duties take a large share in the tax structure of tobacco goods and alcoholic beverages producers, this being one of the reasons of their high tax burden.
Since the VAT offset by foodstuffs producers is small in comparison with VAT paid, VAT takes a large share in the tax structure of foodstuffs producers.
Banking is one of the most dynamically developing sectors of the economy in Kazakhstan. The tax burden indicators for the banking sector are close to the average indicator for the country, and much lower than industry indicators generally. In 1999-2001 the tax burden on added value was 17-23% (table 8).
The Kazakh tax legislation has created factors that should be sufficient to stimulate the development of the financial sector. For example, it provides VAT exemption for finance service turnover. Income from operations with state securities, realization value increments of shares and bonds on the official KASE ‘A’ and ‘B’ lists, profit from investment activities by pension saving funds, and also lending to agricultural legal entities are excluded from aggregate annual taxable income. All this creates favorable conditions for development of the financial sector of the Kazakh economy.
In conclusion, it should be emphasized that this article examines only the trends in the tax burden on enterprises operating in different economic sectors in Kazakhstan.
The economic situation in Kazakhstan has stabilized significantly over recent years. This factor has led to a growth in goods turnover, an increase in profitability and, consequently, in tax revenue. Searching for an optimum system of taxation to stimulate growth of production and investment, and small and medium-size businesses development, has a great importance for Kazakhstan.
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