Who Will Be Hurt by a Sales Tax in Kazakhstan

The basic principle of taxation is fairness, which implies an equal tax burden on every economic agent. Experts have long recognized that a turnover tax (which for some reason has been dubbed a "sales tax" in Kazakhstan) is among the most unfair taxes, and offers no benefit other than simplicity of collection.

This state of affairs says only one thing: a lazy official simply does not want to work, and nobody cares about the efficiency of this form of taxation. The main goal is to fill the treasury, not to develop the economy.

Let me explain why I hold this position.

Today taxes are not only a source of budget revenue but also a stimulus for the economy. Different taxes support some industries and sectors and restrain others.

1. A sales tax supports raw-materials industries and kills high-tech ones.

Any raw material goes through several stages of processing. Each subsequent stage will carry an additional 5% tax, so the deeper the processing, the higher the tax burden. This applies first and foremost to petrochemicals, which Kazakhstan is so keen to develop.

The country's policy is to encourage the production of high value-added goods. But the new tax system would make the final product too expensive and uncompetitive. Industrialization will suffer as a result.

I believe the Atameken National Chamber of Entrepreneurs, whose members include a wide range of manufacturing companies, could produce precise calculations.

2. A sales tax will hurt exporters.

Exporters can currently deduct input VAT: when goods are shipped abroad, the state refunds them this tax. This means that the cost of export products contains no indirect taxes.

A sales tax, which is not refunded, will be embedded in the materials and services used to make export goods, making them expensive and uncompetitive. All this while the government plans to create and actively support export-oriented industries.

3. A sales tax may make imported goods more expensive.

What will be done with goods that Kazakhstan imports? Will they be subject to VAT? If so, the effective tax on imports will be 17% (12% VAT plus 5% sales tax, since these goods are mostly purchased by wholesalers).

On the other hand, those who import goods for production purposes will pay VAT that cannot be reclaimed, which again will push up prices. There is a risk of growth in "gray" sales, since 17% is a lot.

If VAT on imports is abolished, Kazakhstani producers will find themselves on an unequal footing. Finished goods made in, say, Russia would be taxed at 5%, while Kazakhstani goods would be taxed at 15%.

Let me explain how I arrived at this figure. The 5% is the amount of tax a seller pays on turnover. Take fuel production as an example. An oil producer pays 5% on turnover and sells the crude to an oil trader. The trader pays 5% for processing and transportation and sells the fuel to a retailer. The retailer, when filling a motorist's tank, pays another 5%.

4. A sales tax will hurt small and medium-sized businesses.

SMEs are the foundation of any developed country. Their agility and innovation allow the range of goods on offer to expand. But with a sales tax, large companies with a full production cycle will have an advantage over small producers.

Take a small sausage maker and a large farmer who raises livestock, slaughters it and processes the meat. Having made the final product, the farmer will pay no turnover tax, because he processed the meat himself. The small producer, meanwhile, will buy meat that already has tax embedded in it, so it will cost 5% more.

This will reduce the number of SMEs and lead to the monopolization of the market by large players.

5. A sales tax will hurt rural residents.

Large players can sell their products in big cities without intermediaries. But it is impossible to deliver goods to rural areas without retailers. Every link in this chain will pay the notorious 5%, so goods in villages will become more expensive.

6. A sales tax will increase the share of the shadow economy.

In trying to avoid taxes, businesspeople will devise various schemes, especially at the second and third stages of processing and sale. Tolling arrangements, consignment transfers of goods and the like will become popular. The tax authorities will, of course, fight this. The fiscal authorities will probably invoke International Financial Reporting Standards (IFRS) on revenue recognition.

These are the risks that await us if a sales tax is introduced. Every country is moving away from it, yet for some reason we are returning to an anachronism.