Why VAT on Housing Makes No Sense

When the abolition of VAT exemptions was under discussion, one idea was to remove the exemption for residential real estate. In the end it was kept, and that was the right decision. Let me try to explain why introducing VAT on housing would be inexpedient.

First, the social dimension of this exemption cannot be ignored. VAT would raise the cost of housing, particularly because construction is one of the most "shadow-ridden" sectors of the economy, with labor accounting for a large share of costs. Housing would become at least 10–12% more expensive. That alone is significant, but the heaviest blow would fall on social housing, which is built in large volumes and financed from public funds. In that case part of the VAT revenue would simply go to cover the higher costs of social housing, wiping out the potential gains from the tax.

This, however, is not the main reason why VAT on housing would be illogical. The core problem is that new-build housing competes with the secondary market, where the main sellers are individuals who are not VAT payers. Construction companies would find themselves on an uneven playing field: private sellers would not pay VAT, while developers would be obliged to. This would distort the market and put developers at a clear disadvantage.

That is why in many countries housing is either fully exempt from VAT or taxed at a reduced rate. Some countries, however, have infrastructure taxes and levies, which go by different names. As a rule, such levies are earmarked and set by local authorities.

Of the international practices, I particularly like the approach of the United Kingdom, where an infrastructure levy is calculated for each developer in each specific location, depending on the area's development plan. Developers acting alone could not build all the infrastructure a new district needs. But if you calculate the total investment required across all developers and spread those costs over square meters of floor space, the amount turns out to be affordable. In return, developers are guaranteed infrastructure that significantly raises property values in the district, which justifies what they pay in levies. A metro or railway station, schools, kindergartens and hospitals, for example, make a district more attractive and, in turn, push up property prices.

Kazakhstan could likewise introduce a similar local levy under the control of local authorities. The proceeds could be channeled into building urban infrastructure in line with approved master plans. This would ensure balanced development of territories and make new districts more attractive to residents and investors.