The article offers a comprehensive examination of the strategies and mechanisms that could enhance entrepreneurship in Kazakhstan, with a focus on tax reforms, challenges, and potential solutions. It provides a detailed analysis of Kazakhstan's SME sector, including the evolution of tax policies, a comparative perspective with Western practices, and tailored recommendations for the Kazakh context.
Keywords: Taxation, SMEs, Special Tax Regime, Tax Rates, Tax Incentives, Foreign Countries, Tax System of Kazakhstan, Tax Code of Kazakhstan, small and medium-sized enterprises, special tax regime, tax rates, tax incentives, foreign countries, Tax System of the Republic of Kazakhstan, Tax Code of the Republic of Kazakhstan.
Entrepreneurship, as conceptualized by Peter Drucker, transcends mere business initiation, embodying a mindset that discerns opportunities amidst chaos. In the globalized, tech-driven world, entrepreneurship is pivotal for economic and social progress.[1] Kazakhstan, aiming to bolster its economy and enhance international competitiveness, recognizes the crucial role of entrepreneurship, particularly under the contemporary economic dynamics. This section traces the evolution of Kazakhstan's tax policy and legal framework as critical influencers of entrepreneurial activity, highlighting significant milestones like the Presidential Decree of 1995 and the 2009 Tax Code, and discusses ongoing reforms and strategic initiatives under the «Kazakhstan — 2030" vision.
Stimulating Entrepreneurship in Kazakhstan
The foundation for supporting small entrepreneurship in Kazakhstan was laid in the early 1990s, with evolving criteria defining small and medium-sized entrepreneurship (SMEs). This section reviews the legislative backdrop fostering SME growth, detailing the Tax Code's principles aimed at supporting small businesses through differentiated taxation and special regimes. The discussion extends to the pandemic-induced crisis response, contrasting Kazakhstan's measures with international practices, including the U. S.'s R&D Tax Credits and the UK's Small Business Rate Relief. It reflects on Kazakhstan's simplified tax regime for small businesses, emphasizing the need for further policy refinement to bolster SME growth and innovation.
The active development of entrepreneurship in Kazakhstan highlights the importance of tax policy and legal framework as fundamental factors influencing business activity. The Presidential Decree of the Republic of Kazakhstan, dated April 24, 1995, marked a significant step in forming the tax system, laying the groundwork for the subsequent introduction of the Tax Code in 2009. This had a considerable impact on the development of entrepreneurial activity. Reforming the tax system was a crucial moment in creating a favorable investment climate, attractive to both domestic and foreign investors, which, in turn, contributed to accelerating economic growth in the country. Further development of tax policy and support for small, medium, and large businesses became vital directions of the «Kazakhstan — 2030" strategy and the annual messages of the country's President, emphasizing the priority of developing this economic sector. Special attention is given to the general tax regime and to special tax regimes and new legislative enactments during the coronavirus epidemic, providing additional opportunities for individual entrepreneurs. In his message of September 1, 2023, titled «Economic Course of a Fair Kazakhstan», President of the Republic of Kazakhstan Kassym-Jomart Tokayev emphasized the significance of government measures implemented over recent years, which contributed to the stabilization and development of small businesses. However, he also highlighted the country's insufficient pace of medium entrepreneurship development, stressing the need to activate its growth using a hands-on approach.[2]
The need for deep analysis and improvement of tax policy to create a conducive environment for the growth and development of small and medium-sized businesses is brought to the forefront by actualizing entrepreneurship's role in Kazakhstan's economic system. Strategic initiatives proposed within the «Kazakhstan — 2030" strategy and articulated in the President's annual messages underscore the country's aspiration towards economic diversification and stimulating entrepreneurial activity as a cornerstone of sustainable development. Studying tax policy, especially regarding its impact on small and medium size businesses, allows for identifying both positive aspects and challenges entrepreneurs face in Kazakhstan. According to reports by the National Bank of the Republic of Kazakhstan, many entrepreneurs still face high barriers to business operations despite government measures to reduce tax burdens and simplify tax administration.[3] This underscores the importance of continuing reforms and adapting the tax system to meet the needs of the evolving entrepreneurial sector. Based on the analysis, this article offers comprehensive recommendations for improving tax regulation to stimulate entrepreneurial activity in Kazakhstan. It emphasizes the necessity of considering best practices and experiences from developed countries and adapting successful tax strategies to the specifics of the Kazakh economy. The study's goal is to diagnose existing problems and develop practical solutions that can facilitate the activation and development of small and medium-sized entrepreneurship as a crucial factor for economic growth and innovative development. Thus, building on the analysis of national tax policy and international experience, this article proposes targeted measures to enhance support for entrepreneurship in Kazakhstan, highlighting the role of government support and the creation of favorable conditions for small and medium-sized business development.
Challenges and Solutions for Entrepreneurial Growth
Addressing the specific challenges faced by SMEs in Kazakhstan requires a nuanced understanding of sectoral disparities, limited financial resources, and the need for innovation. It stresses the importance of strategic planning and financial stability for the sustainability and growth of SMEs, pointing towards the need for comprehensive policy measures that foster an enabling environment for entrepreneurship.
In the early 1990s, with the Council of Ministers of the Kazakh SSR decree No. 432 «On measures for the creation and development of small enterprises in the Kazakh SSR» dated October 31, 1990, Kazakhstan began to form the foundation for supporting small entrepreneurship. This decree laid the foundation for the country's future development of small businesses. Criteria for defining small and medium-sized business entities changed over time. Initially, the classification was based on quantitative indicators of the number of employees and covered various sectors of the economy with specific threshold values. Later, criteria were expanded to include the number of employees and the total value of enterprises' assets. According to Article 24 of the Entrepreneurial Code of the Republic of Kazakhstan, entrepreneurial entities are classified based on their average annual number of employees and income. They are divided into small, micro-entrepreneurship, medium, and large entrepreneurial entities. The average annual number of employees considers all employees, including those working in branches, representations, and other subdivisions of the entity and the individual entrepreneur himself. The average annual income is the sum of all annual incomes divided by three over the last three years. This includes the incomes of entities applying a special tax regime according to the tax legislation of the Republic of Kazakhstan, including based on a patent, simplified declaration, or through a unique mobile application. The small entrepreneurship category includes individual entrepreneurs who do not have the status of a legal entity, as well as legal entities engaged in business, provided that their average annual number of employees does not exceed one hundred people and their average annual income does not exceed the limit equal to three hundred thousand times the monthly calculation indicator, which is established by budget legislation and is valid on January 1 of the current fiscal year. Micro-entrepreneurship covers those small business entities that conduct private entrepreneurship and have an average annual number of employees of no more than fifteen people or an average annual income not exceeding thirty thousand times the monthly calculation indicator, determined by the budget legislation of the Republic of Kazakhstan on January 1 of each financial year. [4]
The Tax Code of the Republic of Kazakhstan enshrines fundamental principles designed to initiate transformations in tax policy aimed at supporting small businesses. These principles include the introduction of differentiated taxation, adapted to the characteristics and needs of entrepreneurial structures of various organizational and legal forms and different levels of income. Additionally, introducing a specialized tax regime for the agricultural sector plays a significant role as an instrument for economic stimulation. Such a multifaceted approach to tax regulation affects entrepreneurial activity in two ways: through stimulation and regulation. On the one hand, tax incentives function as stimuli; they activate businesses towards certain activities thanks to the possibility of saving on taxes. On the other hand, the taxation system includes regulatory mechanisms that can limit certain activities by increasing tax rates or reducing benefits, thereby shaping the structure of the national economy.
It is important to note that tax incentives and regulatory measures are not independent and can transition into each other, forming a comprehensive tax regulation system. For example, mechanisms such as establishing a non-taxable minimum income can simultaneously serve as both stimulation and limitation, exempting a particular income segment from taxation and thus encouraging economic activity among the population. Ultimately, tax policy can act as a tool for the financial provision of the state budget and as a means of influencing economic development and supporting necessary business sectors and directions. Such is the tax strategy of the Republic of Kazakhstan, representing not only a regulatory instrument but also a catalyst for economic transformations aimed at stimulating the development of small businesses.
In the context of the crisis caused by the coronavirus pandemic, the Government of Kazakhstan developed a series of special measures to support small and medium-sized businesses. As noted by M. T. Takiyev, G. B. Uvakbayeva, and R. K. Berstembayeva in their 2023 work «Contemporary Realities and Problems of Taxation of Entrepreneurial Activity in Kazakhstan», these measures included a moratorium on inspections of small and medium-sized business entities for three years, the provision of a complex of tax incentives, and deferment of loans for industries most affected by the pandemic. These measures aimed to stimulate entrepreneurial activity, which continued in the subsequent period. In 2021, it was envisaged to reduce the tax burden on the wage fund, exempt part of reinvested profits from taxation, and simplify registration procedures using mobile applications. In 2022 response to the January riots, operational support measures were introduced, including compensation for property damage, loan deferment, and suspension of tax and customs inspections.[5]
In the USA, R&D Tax Credits allow small businesses to achieve significant tax savings for their investments in innovative activities. For example, a startup developing new software may spend $100,000 on research and development. Using the R&D Tax Credit, the company can reduce its tax base by a significant amount of these expenses, thereby reducing the overall tax burden and supporting its innovative efforts. Similar incentives exist in other countries, including Kazakhstan, where the government recognizes the importance of supporting research and development activities. In Kazakhstan, various forms of tax incentives and subsidies for small businesses engaged in innovations can be offered, supporting the growth of the national economy and promoting the development of high-tech industries. These measures may include tax holidays, income tax benefits, and support in grants and funding for research projects, making Kazakhstan attractive for innovative enterprises and startups.
In the UK, the Small Business Rate Relief scheme allows small businesses to reduce or avoid paying property tax if the value of their properties falls below a certain threshold. This significantly reduces operating expenses, especially for retail and office enterprises, allowing them to invest more funds in development and expansion. In Kazakhstan, various forms of support for small and medium-sized businesses exist, including tax incentives and state support programs. However, a specific scheme similar to Small Business Rate Relief in the UK, which would directly reduce or cancel property tax for citizens owning small businesses, has not been developed in Kazakhstan.
The «Eingetragener Kaufmann» system in Germany provides small businesses with simplified tax reporting and offers income tax benefits. This simplification of administrative procedures makes the business process less burdensome and allows entrepreneurs to focus on developing their activities rather than bureaucracy. In Kazakhstan, initiatives to support small entrepreneurship are actively being developed, including simplified declaration procedures. Benefits established by the country's Tax Code are aimed at stimulating small businesses using a simplified taxation system. However, such preferences are only granted to business people who attract qualified specialists.
In Kazakhstan, the simplified tax regime for small businesses aims to reduce administrative burden and tax rates for specific categories of entrepreneurs. This creates more favorable conditions for doing business and contributes to improving the business climate. However, compared to Western countries, Kazakhstan may experience limited access to financing and support for innovations through the tax system, underscoring the need for further development and adaptation of tax policy to stimulate the growth of small businesses. [6]Examples describing various tax incentives and benefits can contribute to the development of small businesses, stimulating innovative activity and reducing operational expenses. For Kazakhstan, studying and adapting successful practices from other countries can be vital to creating a more favorable economic environment for small businesses.
The National Bank of Kazakhstan, in the publication «On the results of the survey of banks on lending for the II quarter of 2023», notes several key points, especially concerning small businesses in Kazakhstan. The demand for loans from small businesses significantly increased thanks to the resumption of financing under the state program and the expansion of the list of partners and product lines by individual banks. This led to a 21 % increase in the total number of small business loan applications compared to the previous quarter. [6]This increase in demand indicates the recovery of small business activity and its aspiration to expand and develop under the support of state programs and banking initiatives. It is noted that the terms of lending remained essentially unchanged, although some large banks reported softening the parameters for considering applications and improving scoring models. In the context of small businesses, the decrease in the approval rate of loan applications in the reporting quarter to 36 % may indicate high competition and creditworthiness requirements despite the increase in the number of applications. [6] This emphasizes the importance of preparing quality loan applications and developing effective business plans for small businesses. Banks' expectation of a decrease in loan demand in the next quarter may be associated with the timely utilization of allocated funds and the suspension of financing under state programs. This highlights the need for small businesses to seek alternative sources of financing and adapt to changing market conditions. In conclusion, the results of the bank lending survey for the II quarter of 2023 reflect a positive dynamic in the small business segment, expressed in increased demand for loans and active participation in state programs and banking initiatives. However, the upcoming decrease in loan demand requires flexibility from small businesses and the search for new development paths.
As revealed by Takiyev and Uvakbayeva in the 2023 study «Contemporary Realities and Problems of Taxation of Entrepreneurial Activity in Kazakhstan», small and medium-sized entrepreneurship (SME) in Kazakhstan demonstrated critical positive changes. However, despite these successes, significant problems requiring attention exist. The analysis showed that the dynamics of SMEs have not yet reached the expected qualitative growth.SME issues cover a wide range of topics, including sectoral and regional disparities, limited financial resources, insufficient financial stability, high indebtedness, the short life cycle of enterprises, lack of strategic planning, and low level of innovative activity. Considering the specifics of the Kazakh economy, where agriculture traditionally plays a significant role, the need to develop SMEs in the agro-industrial complex becomes evident. This includes improving conditions for storing and processing agricultural products, which can contribute to increasing the qualitative indicators of SME dynamics and eliminating existing disparities.[5]
Conclusion
The exploration of entrepreneurship stimulation in Kazakhstan reveals a multifaceted landscape marked by notable efforts towards tax reform and SME support, juxtaposed with persistent challenges that hamper the sector's full potential. Drawing from the comparative analysis with Western countries, it is evident that while Kazakhstan has made strides in crafting policies conducive to entrepreneurship, gaps remain in achieving the qualitative growth expected for SMEs. The country's unique economic and sectoral contexts, particularly the prominence of the agricultural sector, necessitate tailored solutions that not only address financial and regulatory barriers but also foster innovation and strategic development within SMEs. Recommendations for future policy formulation should consider the integration of successful international practices, adapted to Kazakhstan's economic realities. These include enhancing access to finance, simplifying tax regimes further, and providing targeted support for innovation and strategic planning within SMEs. Strengthening the entrepreneurship ecosystem in Kazakhstan requires a holistic approach that balances regulatory support with proactive measures to encourage entrepreneurial ventures, especially in high-growth and innovative sectors.
Ultimately, fostering a vibrant SME sector in Kazakhstan hinges on a collaborative effort between the government, financial institutions, and the entrepreneurial community to create an environment where small and medium-sized enterprises can thrive, innovate, and contribute significantly to the nation's economic diversification and resilience.
References:
- Drucker, P. F. 1. (1999). Innovation and entrepreneurship: practice and principles. New ed. Oxford, Eng.; New York, Elsevier Butterworth-Heinemann.
- National Bank of Kazakhstan. (2023, August 22). About the results of the banks' survey on lending for the second quarter of 2023. https://nationalbank.kz/ru/news/informacionnye-soobshcheniya/15850
- President of the Republic of Kazakhstan. (2020). Address of the Head of State Kassym-Jomart Tokayev to the people of Kazakhstan “The Economic Course of Fair Kazakhstan”. https://www.akorda.kz/ru/poslanie-glavy-gosudarstva-kasym-zhomarta-tokaeva-narodu-kazahstana-ekonomicheskiy-kurs-spravedlivogo-kazahstana-18588
- Entrepreneurial Code of the Republic of Kazakhstan, Article 24. Retrieved January 10, 2023, from https://www.gov.kz/legalacts/details/K1500000375?lang=ru#z378
- Takiev, М.T, Uvakbayeva G. B., Berstembayeva R. K. “Modern Realities and Problems of Taxation of Entrepreneurial Activity in Kazakhstan.” KazUEFIT Herald, vol. 2, no. 2023, vestnik.kuef.kz/web/uploads/file-vestnik/047bee3c6bacdcbce8a2941d3efa1554.pdf, https://doi.org/10.52260/2304–7216.2023.2(51).37. Accessed 5 Feb. 2024.
- National Bank of Kazakhstan. (2023, August 22). On the results of the bank lending survey for the second quarter of 2023. Retrieved from https://nationalbank.kz/ru/news/informacionnye-soobshcheniya/15850
