Cash-strapped Kazakhstan is finally going to start making its citizens declare their incomes from 2017 in a bid to boost budget revenue, as the corporate tax take falls because of the economic slowdown caused by low oil and other commodity prices.
The government plans that the measure will start with civil servants and public sector workers in 2017 and will be expanded to cover the rest of the population from 2020. The exercise will also help reduce the black economy in the country, Astana hopes.
The government has been talking of making citizens declare their income for years when the oil price stayed relatively high, but the current crisis seems to have sped up the process.
As the oil price started collapsing in mid-2014 the government reduced forecasts for corporate income tax and VAT from KZT1.21tn ($6.75bn) and KZT1.23tn ($6.86bn) in 2014 to KZT994.6bn ($4.48bn) and KZT945.7bn ($4.27bn) in 2015. An increase in forecasts for the tenge values of these taxes to KZT1.16tn ($3.22bn) and KZT1.28tn ($3.56bn) respectively failed to counterbalance a more than 40% depreciation of the tenge against the dollar as a result of the adoption of a free-floating exchange regime in August 2015.
The Kazakh government coffers do not directly receive revenue from the oil and gas and other extractive sectors, which are instead accumulated in the National Oil Fund and are then released to the budget in the form of guaranteed annual transfers of $8bn and a special targeted transfer worth $2.24bn in 2016. However, taxes, royalties and other payments from the oil and gas sector to the National Oil Fund decreased from KZT3.5tn ($19.5bn) in 2014 to KZT1.6tn ($7.2bn) in 2015.
In contrast to the corporate sector’s budget contributions, personal income tax has increased by 12% y/y to KZT552bn in 2014 and by 8.4% y/y to KZT599bn in 2015. The collection of personal income tax increased by 16% y/y to KZT235bn in January-April 2016, in pace with the annual inflation rate which stood at 16.3% in April.
The adoption of the system of income and property declaration for civil servants, judges, central bank staff as well as workers of national companies and state-run enterprises covering a total of 1.8mn people in 2017 is preceding alongside a campaign to legalise shadow capital and undocumented property. The campaign, launched in September 2014 and to be carried out until the end of 2016, has so far legalised KZT1.7tn ($5bn at the current exchange rate) worth of shadow capital and undocumented property, with a further KZT300bn under consideration.
The logic behind the campaign, the government believes, is to give the population an opportunity to bring unaccounted capital and property out of the shadows without paying taxes or bearing responsibility, unless they were obtained criminally, before they start declaring their incomes and properties.
The government estimated that the campaign would legalise up to $12bn in shadow capital and property, increasing the tax base and reducing the black economy.
This is Kazakhstan’s third attempt to reduce the shadow economy, which is estimated at 27.3% of GDP in 2014, including illegal activities equivalent to 2.2% of GDP, according to official statistics; the first amnesty in 2001 encouraged around 3,000 Kazakh citizens to legalise a total of $480mn in a 20-day campaign; in 2006-2007, $5.3bn ($3bn in money and $2.3bn in property) was legalised.
In order to make the income declaration exercise efficient, the government threatens that the next step will be citizens’ declaration of their expenditure: discrepancy in incomes and expenditure declared, for example when citizens purchase property or cars, will be taxed at a rate of 10% paid by employees. Self-employed, registered as “individual entrepreneurs”, pay taxes at a rate of 1% for incomes under 600 government-set minimum monthly wages per year (roughly $41,000 at the current exchange rate) and 1.5% for incomes above this figure but less than 2,800 minimum monthly wages per year (roughly $190,000 per year).
Despite the relatively low rates of personal income tax in Kazakhstan, the government believes income declarations will increase personal tax collection in the country to levels comparable to other countries; in 2013 personal income tax was equivalent to 1.3% of Kazakhstan’s GDP against 9.2% in the US, 10.2% in the UK and 15.5% in Sweden, according to OECD figures.