Current legislative standards
According to paragraph 1 of Article 2 of the RoK Law “On Accounting and Financial Reporting”, the effect of this Law shall extend to:
- individual entrepreneurs (IE);
- legal entities, branches, representative offices and permanent establishments of foreign legal entities registered in the Republic of Kazakhstan in accordance with the legislation of the Republic of Kazakhstan.
At that, large-scale business entities and public interest organizations are obliged to prepare financial statements in accordance with IFRS.
Financial organizations maintain accounting and prepare financial statements in accordance with IFRS and regulatory acts of the National Bank of the Republic of Kazakhstan on accounting and financial reporting.
Special financial companies and Islamic special financial companies maintain accounting records and prepare financial statements in accordance with IFRS.
Medium-sized business entities, as well as state enterprises based on the right of operational management (state-owned enterprises) shall prepare financial statements in accordance with the international standard for small and medium-sized businesses.
Small business entities, as well as legal entities whose exclusive activity is the organization of exchange transactions with foreign currency, shall prepare financial statements in accordance with the national standard, i.e. they are allowed not to apply IFRS.
According to paragraph 2 of Article 2 of the RoK Law “On Accounting and Financial Reporting”, only individual entrepreneurs (IE) are exempted from maintaining accounting records, provided that the IE simultaneously meet the following conditions:
- apply, in accordance with the Tax code, special tax regimes (STR) on the basis of a patent or simplified declaration;
- are not registered as VAT payers;
- are not subjects of natural monopolies and regulated markets.
Failing to meet one of the above-mentioned conditions, the IE is obliged to maintain accounting records and prepare financial statements starting from the month following the month in which such non-compliance occurred.
An individual entrepreneur (IE) who meets the above conditions, but who has independently decided to maintain accounting records and financial reports, is entitled to maintain such records from the month following the month in which such a decision was made.
According to results of the field study carried out by the Association of Legal Entities “Forum of Kazakhstan’s Entrepreneurs” taking into account the stated provisions of the Law on Accounting, the most part of IEs applying the special tax regime (STR) on the basis of a patent or STR on the basis of a simplified declaration do not maintain accounting records.
Analysis, questions and proposed solutions
The fact that IEs do not keep accounting records is explained by the fact that most IEs do not need accounting and financial reporting data, as well as by disproportionate expenses to organize and maintain accounting, as compared to large and medium-sized businesses.
When comparing small businesses with large ones, one must consider financial expenses, labor costs, as well as psychological costs.
Expenses for accounts maintenance incurred by small-scale business entities are higher, because large and medium businesses maintain accounts not only for taxation purposes, but also for administrative and other purposes.
In the meantime, small businesses usually need accounting data only for the assessment of tax liabilities.
The psychological costs include the justified lack of knowledge of IFRS theory and principles, procedures for accounts keeping and preparation of financial statements by the majority of RoK citizens. This statement regarding citizens equally applies to entrepreneurs – small business entities. Just the thought of the need to keep accounts, and especially, about the need to prepare financial statements, kills the entrepreneur’s desire to conduct legal business and apply, for example, STR using a fixed deduction or become a VAT payer.
Therefore, it would be economically and psychologically justified if individual entrepreneurs applying STR on the basis of a patent and STR on the basis of a simplified declaration would be exempted from an obligation to maintain accounting.
It is absolutely incomprehensible that IEs applying STR with the use of a fixed deduction are still required to maintain accounts, although the Tax Code contains a full description of tax accounting rules that are not based on bookkeeping and significantly differ from it.
Another incomprehensible requirement creating obstacles for legalization of small business transactions is the compulsory maintenance of accounts for IEs being VAT payers.
The solution could be a permission not to keep accounting for all IEs applying any of the established STR for small businesses, including those who apply STR using a fixed deduction.
In our opinion, individual entrepreneurs should be exempted from the obligation to maintain accounting records in cases when the individual entrepreneur is a VAT payer.
Cancelling the requirement for IEs to keep accounts will allow IEs, without incurring significant additional expenses for the organization of accounting, to switch over to the accounting for revenues and expenses, and, accordingly, to the accounting for VAT received and paid.
It should be noted that the entrepreneur’s using the opportunity to apply the STR while being a VAT payer would be a significant incentive for the use of non-cash payments and for the transition to the revenue and expense accounting.
Instead of bookkeeping, the said IEs will be required to maintain tax accounting established by the tax legislation, in particular – VAT accounting, which should be as simple as possible.
This solution will substantially remove the obstacle for the registration of IE business (will reduce the shadow sector) and will reduce IE’s costs for accounts maintenance.
This recommendation bears no significant risks for the government for the following reasons:
- according to results of the field study conducted by the Association of Legal Entities “Forum of Kazakhstan’s Entrepreneurs”, IEs with rare exceptions, do not maintain accounting records;
- the tax accounting procedure established for all STRs, taking into account its improvements, is sufficient for the fulfillment of tax obligations.
In order to stimulate non-cash payments, in our opinion, it would also be expedient that income earned by such IEs from non-cash payments, including income received from payment cards (to the extent of amount allowing the use of STR for small businesses) should not be taken into account in calculating a threshold for VAT registration of such IEs.
The basis for changing the situation with simplifying accounting procedures and tax administration of small and medium businesses (SMB) should be the use of ERP-systems (automation of accounting and data exchange, in particular, with the possibility of automated preparation of tax reports, including VAT reports).
Digitization as a tool to simplify accounting procedures
The factor that should contribute to simplifying the IE’s tax accounting procedures is the digitization of accounting. At present, with the development of digital technologies, the tax accounting of individual entrepreneurs, including the preparation and submission of tax reports, can be fully automated.
For example, an IE, depending on the capabilities of a software product available to him, can do the following staying in his market outlet and using his smartphone:
- maintain accounting for goods and cash movements;
- register the purchases and sales of goods by issuing electronic invoices;
- make payments for purchased goods and services;
- automatically record income from non-cash payments for goods sold;
- maintain personnel records;
- maintain full tax accounting, in particular – keep tax registers and generate tax reports, use automatic completion of tax forms, calculate taxes and payments for himself and his employees, submit tax reports,
- pay Taxes and payments.
All these digitalization features, convenient and easy to use, stimulate non-cash payments, which will reduce the shadow sector of the economy and, consequently, increase the taxable base.
In solving the issue of switching IE’s accounting to digital technologies, companies that implement digital tools (software products) used for SMB accounting and reporting can provide an active assistance to the government.
However, this process needs to be systematized by establishing registration of such companies and their software products for example, with “Atameken” National Chamber of Entrepreneurs of the Republic of Kazakhstan (Atameken NCE RK) on the basis of the joint plan of measures for the development of SMB Tax relations between Atameken NCE and the State Revenue Committee of the Ministry of Finance of the Republic of Kazakhstan (SRC MF RK). This simple action will automatically give companies the status of state approval of their activities and increase public confidence.
In addition, SRC MF RK and Atameken NCE, by placing information about companies and their software products on their information resources, popularize their activities, which will also contribute to the expansion of digitalization of tax accounting of individual entrepreneurs.
The fact of digitization of IE’s accounting should be added to RMS criteria as one of the factors that reduces the level of IE risks shown for the IE in its taxpayer’s cabinet. This will facilitate the establishment of remote and “partner” relations between the IEs and the State Revenue Authorities.
The use of digital technologies to simplify SMB accounting procedures is a matter of extreme importance.
The author is grateful to “Atameken” NCE and “Forum of Kazakhstan’s Entrepreneurs” ALE for the provided information about the ongoing activities to support small and medium-sized businesses.