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: / Analytics / The Tax System of the Kyrgyz Republic (2003)




Kyrgyzstan Review, 10 years ago




5.3. Kazakhstan

From the time of getting independence, economic reforms in Kazakhstan were typical for the majority of the post-soviet Republics and had similar results. In 1997 budget revenues were equal to 13.3% of GDP, tax receipts amounted to 12% of GDP, the budget deficit was equal to 6.9% of GDP. Fall in world prices for oil and the Russian crisis in 1998 have additionally aggravated the situation. The next stage of reforms began as early as 1998, when the pension system was changed. The old, traditional pension system was cancelled, and the accumulated debt on pensions turned into liabilities of the government budget. A new pension system was established instead, which was based on compulsory cumulative deductions in the amount of 10% of wages invested in the private funds, and social tax with the rate of 21% of income was preserved for the purpose of insuring payments for nowadays pensioners and for the guaranteed minimal amount of the future pensions. These deductions are excluded from the taxable base, when assessing income tax, but when a person retires on a pension, income received from private pension funds is income taxed.
 
The reforms of the tax system began in 1999.
 
¨ In April 1999 the scale of income tax was changed. The number of brackets on the scale was decreased from 6 to 4. The new tax rates were fixed at the levels of 5%, 10%, 20% and 30%. The highest rate is applied to annual incomes, which exceed US$37 thousand.
¨ In July 2000 unified VAT rate was fixed at the level of 16 % (instead of 10% and 20%).
¨ The VAT destination principle was introduced in trade with the CIS countries (except for energy sector).
¨ Refunds connected with the zero rate of VAT grew. Where suppliers violate the rules, the amounts of these refunds are transferred to the budget.
¨ To prevent undercutting of prices for imported goods, normative prices were calculated; for the purposes of taxation the maximum out of normative price and price declared by an importer is used.
¨ Excise taxes, customs duties and payments were included into the cost of taxable turnover and taxable imports.
¨ Where supplies of power take place, the whole supply is excise taxed, irrespective of whether it was paid for by a consumer; i.e., debt receivable is also subject to taxation.
¨ Property tax was imposed with the rate of 1%.
¨ Higher rates of land tax were fixed for the plots adjoining the house, kitchen gardens and cottages in the populated areas.
¨ Higher rates of tax on transport facilities were fixed based on the size of the engine. Special increasing ratios were stipulated for high performance cars.
¨ In 2000 deductions of profits tax were revoked, which were applied to purchase of technological equipment and increase of fixed capital due to acquisition of capital assets.
¨ In 2000 the President Nazarbaev adopted a Decree on the rules regulating granting of privileges to investors, who invest funds in priority sectors of economy. According to this Decree, privileges shall be granted at the time of signing an investment agreement. These privileges imply exemption from land tax and property tax, and exemption from profits tax for a five year period from the time, when the first income was received, but no more than eight years form the time of signing the agreement.
 
It is difficult to assess the results of reforms in Kazakhstan from only a positive or a negative point of view. In 2000 the government budget revenues increased by 33% in real terms having amounted to 21.9% of GDP. This growth was mainly provided by profits tax, which grew from 2.7% of GDP in 1999 to 6.3% of GDP in 2000. However, increase of profits tax collections cannot be explained solely by reforms in the spheres of taxation and administration. Given below are other reasons for the above mentioned:
¨ significant growth of export prices for raw materials;
¨ 5-10 times growth of the taxable base (!) due to increase of the number of companies engaged in exploration and processing of raw materials.
 
Tax revenues of the Kazakh budget from the oil industry grew from 5% of the total revenues in 1999 to 25% in 2001. Sensitivity of the budget to changes in oil prices has increased for 2002 to 0.4% of GDP for every $1/bbl change in international prices. Increase of crude oil extraction by 65%, as forecasted for the period of 2002-2005, will increase dependence of the Kazakh budget on revenues from oil even further.
 
Despite a stable growth of nominal incomes of the population for the last two years, the level of income tax collections remained low (about 2% of GDP). The same situation remains in the system of social contributions.
 
Real VAT collections grew, but mainly at the expense of import VAT, whose volumes significantly increased.
 
The customs administration reform is being implemented rather slowly, the program aimed at growth of effectiveness in excise tax collections from oil products -as well.
 
In conclusion one should stress a significant progress taking place in reforming of the treasury system, which, despite significant overfulfillment of the last year budget revenue plan, has managed to perform budget implementation in an orderly manner.
 
Evidently, it is prematurely to come to any conclusions in regard to tax reforms in Kazakhstan. It is clear, that the difference in the structure of the Kazakh and Kyrgyz economies, particularly in provision with raw materials, does not make it possible to repeat the Kazakh reforms in their entirety, even if they would have been recognized very successful. It is not recommended for Kyrgyzstan to pursue the import substitution policy and grant privileges to certain branches of economy and certain investors. The system of income tax with 4 rates is too complicated. However, the experience of Kazakhstan, connected with imposition of property tax, modernization of the treasury system and reform of the pension system deserves profound consideration.