On the Construction Market

2025 is drawing to a close, which means the new Tax Code will come into force very soon. The code fundamentally resolves a number of issues that will have a long-term positive effect on the economy, though in its first year it will put pressure on some industries that lose their tax breaks. I am strongly opposed to tax breaks that create not new added value but opportunities to avoid taxes and to build uncompetitive advantages. In the long term, such measures do enormous harm to development and competition. Individual entrepreneurs may seem to benefit from them, but the industry as a whole suffers badly. The new Tax Code improves competition among businesses by cutting back tax breaks. I believe this will give a boost to strong medium-sized and large companies in the country that have grown through competition rather than through preferences.

The most significant change is the increase of the VAT rate to 16%. This is better described as inevitable, since VAT is the only tax that can quickly address the country's huge budget imbalance. Work on the expenditure side is undoubtedly needed as well, but it does not remove the need to raise budget revenues, because spending cuts alone will not solve the deficit problem. Say the deficit is KZT 5 trillion and the potential for spending cuts is KZT 500 billion: these figures are not even remotely comparable.

Nevertheless, there is one industry that will feel the greatest impact of the VAT reform, and not so much from the rate itself as from the fact that its output becomes subject to taxation.

I am speaking about housing construction. From 2026, VAT will apply to apartments whose construction begins on or after 1 January 2026. In practice, we as a country will begin to feel the effect from 2027, when apartments and houses started in 2026 reach the market. Even so, the issue calls for a deeper discussion.

International practice on this question is very broad. Many countries apply reduced rates depending on floor area, and some use stamp duties or infrastructure levies. In many countries there is no VAT on housing at all. In Kazakhstan, introducing VAT on housing while simultaneously abolishing the tax breaks for small businesses, which were the main contractors for many construction companies, will raise construction costs and effectively lower the net sale price because of the VAT.

The main problem in housing construction is that developers compete not only with one another but also with the secondary market and the private sector.

Consider a simplified profitability example. Suppose 1 square metre costs KZT 500,000 on the primary market, with a cost of KZT 400,000, of which KZT 300,000 consists of expenses that include VAT. Under the current tax system, the developer's profit is KZT 100,000, or KZT 80,000 after CIT.

Under the new system, the net sale price will be KZT 420,000 and the cost KZT 352,000. Profit before tax is KZT 68,000 and net profit is KZT 54,400. Net profit falls by KZT 25,600, or 32%. That is a rather large drop for developers. They can offset it only by raising prices, but housing prices are always constrained by demand. At present, developers earn their largest profits in big cities, while in small and medium-sized towns they operate on the edge of profitability. Lower returns under the new tax system will make housing in the regions more expensive and slow the pace of construction, and the share of the private sector and self-built housing will grow again. We can also expect the secondary housing market to become more expensive.

I think we need to take a deeper and more balanced look at this problem and weigh all the pros and cons, because for the regions urbanization is one of the drivers of economic growth.