Why VAT Revenues Rose 125-Fold in Early 2016

Yesterday a debate flared up over VAT revenues for the first two months of 2016 compared with the first two months of 2015. At issue were the reasons for the sharp increase in VAT revenues in the first two months of 2016 relative to 2015. The increase was 125-fold, and the main theme in the experts' comments in the media was that Kazakhstani enterprises are performing better thanks to a timely and well-executed devaluation.

First, devaluation alone cannot produce a 125-fold increase in budget revenues. That is simply wrong, and when people write such things, you begin to doubt whether these experts are in touch with reality.

Second, explaining the change in VAT requires a factor analysis. The reports show net VAT revenues, that is, after refunds, so to analyze them one has to look at both VAT receipts and VAT refunds.

Third, the VAT data were not grouped quite correctly for the analysis. The figures published on the portal of the State Revenue Committee (SRC) are completely different.

In the first two months of 2015, VAT revenues actually totaled KZT 90 billion. Of this, KZT 15.9 billion was VAT on services provided by non-residents, KZT 89.2 billion was VAT on imports, and minus KZT 14 billion was VAT on goods and services produced inside Kazakhstan.

In the first two months of 2016, VAT revenues actually totaled KZT 264.2 billion, including:

• VAT on non-residents: KZT 21.7 billion
• VAT on imports: KZT 110.1 billion
• VAT on goods, works and services produced inside Kazakhstan: KZT 131.6 billion

Let's now look at this in more detail.

VAT on non-residents is levied on services that non-residents provide in Kazakhstan. This amount rose by 36%. It most likely means that physical volumes declined, while nominal volumes grew because of the devaluation.

VAT on imports rose by 23.5%, which also suggests that physical volumes most likely fell while nominal volumes grew because of the devaluation.

VAT on domestic production rose from minus KZT 14 billion to KZT 131 billion. To understand this growth, we need more detailed data. If Daulet Yergozhin made the data on receipts and refunds public, a detailed analysis would be possible.

For everyone's reference: VAT payments made in February relate to the fourth quarter of the previous year. Accordingly, VAT received in the first quarter of 2015 was for the fourth quarter of 2014, when oil prices had not yet fallen so sharply, Russian imports were only just beginning to put pressure on our producers, and the average exchange rate was 3.9 tenge per ruble. In fact, the pressure began only in 2015.

The main reason was a large VAT refund in January 2015, which meant that refunds actually exceeded VAT receipts. This was done to support our exporters amid falling oil prices.

In Kazakhstan, VAT refunds are often paid not within the prescribed deadlines but according to what the budget can afford. After the 2014 budget execution was closed, all of that VAT was refunded in 2015 so as not to put pressure on budget execution.

Now to the analysis of 2016 and why the amount rose.

Several factors are at work here:

1. Refunds fell sharply. Many exporters began to wind down their investment programs, which reduced investment-related VAT and, in turn, refunds. I think that with information from exporters' taxpayer accounts showing the growth in accumulated VAT, we could study this in more detail.

2. The SRC currently has little money, so it is reluctant to refund accumulated VAT. As a result, net VAT revenues are rising. This should also be checked against the declared balance of VAT subject to refund.

3. Nominal value added grew because of the devaluation, or more precisely, because of inflation. Incidentally, VAT revenues are one way to check real inflation in the country.

So what we need are real calculations and analysis, not unsubstantiated claims.