On April 9, a draft Tax Code was submitted to the Mazhilis, the lower house of Kazakhstan’s Parliament.
As the bill awaits its second reading, The Astana Times consulted the World Bank’s office in Kazakhstan to explore the key elements of a stable and fair tax policy, The Caspian Post reports.
Below is the Q&A with World Bank’s economists based in Kazakhstan and Washington D.C. - Azamat Agaidarov, Rajiv Kumar, Arbind Modi, and Natasha Sharma.
The goal of the new Tax Code, as officials put it, is to make tax policy more understandable, stable and fair. From the World Bank’s perspective, what policy choices will be key to delivering on these promises?
Taxes are topical. People worry about how changes in taxes will affect their disposable income and capacity to save. An onerous and high-tax environment may deter businesses from investing, while low revenue collection can affect a state’s ability to finance public services and ensure the safety of citizens.
In Kazakhstan, the government spends more money than it collects. This results in a persistent and rising budget deficit, estimated at 3.7% of GDP in 2024. Between 2015-2022, total tax revenues constituted just 17% of GDP, compared to an OECD average of 34%, and lagged notably behind resource-rich peers.
Raising revenues is essential for the government to implement its development plans, including the revitalization of infrastructure and expansion of social programs. Moreover, an efficient and transparent tax structure, which minimizes distortions, can support a more business-friendly environment, enabling the economy to develop new industries, beyond oil and gas, which can support long-term productivity.
The revision of the Tax Code provides a broader entry point for advancing the country’s development strategy and promoting equity. Here are policy issues to consider from the World Bank’s perspective.
Striking the right balance when determining tax rates. Ultimately, taxes are borne by individuals with corporations acting as conduits. The combined tax on corporate profits (corporate income tax plus tax on dividends and capital gains) should be aligned with the amount of the top individual tax rate. In the existing system, corporate income tax has a flat 20% rate, compared with a flat personal income tax rate of 10%, which creates a bias against the corporate structure.
A progressive personal income tax system should be considered. With a progressive tax structure, taxes are set based on the ability to pay. Individuals with a higher income pay more than those with a lower income, which is a way to support fairness.
In Kazakhstan, the personal income tax averaged just 1.3% of GDP over the last five years, which is lower than nearly all peer countries. Any movement to a progressive income tax should be grounded in simplicity and the rates set in a way that is easy to understand to support compliance. In addition, there may be other ways to achieve progressive fiscal policy such as through transfers that target poor and vulnerable households as well as tax credits, including deductions or credits for child and dependent care, which can support working mothers.
Enhancing competition by removing distortions from extensive tax incentives and exemptions. While incentives can promote investment or develop promising sectors, practice in other countries highlights challenges such as creating inefficiencies, erosion of the tax base, and complicating tax administration. Corporate income tax to GDP has averaged nearly 5% over the last five years but is on a steady downward trend. A key priority should be to rationalize/phase out corporate tax incentives that are ineffective, based on the evaluation of costs and benefits. Similarly, value-added tax, which is a consumption tax applied to goods and services, includes extensive exemptions, which benefit all consumers (not just low-income households), thereby reducing the neutrality and efficiency of the tax.
Leveraging the excise system to offset harmful costs to society, known as negative externalities. The excise tax system can be modernized to offset negative externalities from goods like alcohol, tobacco, fossil fuels, and sugar-sweetened beverages, power, and plastics. Specifically, an excise levy for sugar sweetened beverages should be included. Relatively low levels of excise taxation on alcohol have an indirect bias against women, since alcohol is more widely consumed by men and over-consumption is linked to gender-based violence, income loss and caregiving burdens.
Placing a price on global greenhouse gas emissions through the introduction of a carbon tax. Implementing a carbon tax would help to decarbonize sectors that will be subject to the EU’s carbon border adjustment mechanism and enhance the competitiveness of these industries in EU markets. Kazakhstan already has some elements of a carbon tax in place, as excise taxes are levied on transport fuels. The existing excise system could be strengthened by incorporating the carbon emissions factor and applying a carbon tax to all fuels, including natural gas and coal. This type of excise tax is difficult to avoid and captures the informal sector - important considerations for tax system design. By applying a carbon tax very gradually, Kazakhstan could raise 1.9% of additional revenues to GDP in 2030, as well as cumulative additional revenues projected at $15 billion between 2025-30.
Considering fairness and how taxes affect wealth. The new Tax Code provides an opportunity to consider a comprehensive tax on net wealth and inheritance in lieu of taxation of specific assets. Furthermore, for the case of land, a broad-based land tax should be considered, since wealthier entities often hold the majority of the land. Reforms to capital gains tax could also allow for a fairer and more accurate tax system by ensuring that investors are taxed on their overall net profit rather than individual transaction gains. The removal of any distortionary exemptions would promote efficiency and fairness.
How does Kazakhstan’s approach to tax reform compare with trends the World Bank is seeing in other upper-middle-income or resource-based economies?
Kazakhstan’s tax reform aligns with broader trends among upper-middle-income and resource-rich economies that are seeking to enhance revenue mobilization, reduce economic distortions, and support economic diversification to reduce resource dependence. Like peers such as Mexico, Indonesia, and Colombia, Kazakhstan is aiming to broaden the tax base, reduce inefficient exemptions, and modernize tax administration. Its focus on simplifying the tax code and improving fairness is consistent with the growing global emphasis on transparency and equity.
Kazakhstan has already stated intentions to implement progressive taxation, which would bring practices in line with other countries undertaking reforms. Between 2017-23, personal income tax to GDP averaged just 1.4% of GDP compared with 4.4% for regional peer countries. Childcare-related tax benefits have been implemented in several countries such as Malaysia, Mexico and China. To deepen reforms on sectoral corporate tax incentives, other countries are implementing performance-linked incentives with sunset provisions, which is an approach that Kazakhstan could consider.
Other countries like New Zealand, Singapore, Colombia, and Uzbekistan have operational models of a simpler consumption tax regime comprising a uniform VAT with few exemptions and separate targeted redistribution mechanisms.
Reform of the VAT structure through reducing exemptions could help increase revenues from the current 4% of GDP between 2017-23 to a level closer to regional peers of 9% of GDP. Several countries, like South Africa and Scotland, have reformed the excise tax system to reflect negative environmental and social costs on goods such as alcohol as part of wider efforts to reduce gender-based violence and other social harms. And middle-income countries are increasingly making progress in carbon pricing implementation, including Brazil and Türkiye, with an estimated 75 carbon taxes and emissions trading systems in operation worldwide.
What is the bottom-line assessment of the World Bank?
In sum, Kazakhstan’s reform of the Tax Code offers an opportunity to remove distortions to support competition, introduce progressive taxation to improve fairness, and allow for the right pricing of goods and services which have harmful consequences. These reforms can support growth, broaden the tax base, and raise revenues in a fair way to enhance overall fiscal space, which would strengthen Kazakhstan’s position among reforming peers and is discussed extensively in the World Bank’s Kazakhstan Economic Update.
