Legal aspects of VAT exemption of religious associations

In any modern state the taxation system functions as an obligatory and inherent element. Taxes are the main form of government revenue, and at the same time, in addition to solving financial problems, the tax mechanism plays an important role in the economic interaction of various public interests.

We see tax benefits as one of the forms of such interaction. This institution has long been known to tax systems all around the world. According to S.T. Alibekov, Doctor of Law: "The state uses tax benefits as one of the tools for implementing priority areas of economic development, such as the social sphere... This is a legally established component of the tax system that provides financial and economic incentives for entrepreneurship activities of payers by easing the tax burden"[1].

E.V. Porokhov, Doctor of Law, assesses the history of tax benefits in Kazakhstan as a history of preferences and priorities in development, first of all, of the state itself and its social and economic system. Besides, he clarifies that "tax benefits are provided to certain categories of persons who are initially taxpayers, but at the same time enjoy targeted and dedicated government protection or support"[2].

As part of our topic, we would like to note that since its formation the Republic of Kazakhstan has treated religious associations as such taxpayers. This conclusion can be drawn from the fact that the state separate religious associations from other entities, and the religious sphere enjoyed certain tax benefits and was exempted from the value added tax ("VAT") to a certain extent.

For example, Article 57.1.5 of the Law of the Republic of Kazakhstan On Taxes and Other Obligatory Payments to the Budget dated 24 April 1995 provided for VAT exemption for non-profit organizations if they provided services related to the protection and social security of children, the elderly and the disabled, services in the field of culture, science, physical education and sports, as well as practicing rites and ceremonies by religious organizations.

This provision changed significantly due to the adoption of the new Tax Code (the "Kazakhstan Tax Code") on 12 June 2001 which contained special Article 229.1.2 that exempted religious organizations from VAT with respect to turnover related to practicing rites and ceremonies, the sale of religious items.

In our opinion, thanks to this provision, the principle of tax benefits for religious associations was fully implemented at that time and thus represented the State's support and the State's favourable attitude to the religious sphere, inherent in that period of our country.

However, after the adoption of the new Kazakhstan Tax Code dated 10 August 2008, this procedure noticeably changed. A special article regulating the taxation of religious associations was no longer included, and general Article 248 (1.24), only turnovers on the sale of religious items by religious associations registered with the judicial authorities of the Republic of Kazakhstan were exempted from VAT.

It is noteworthy that this provision referred to another legal act of the Government of the Republic of Kazakhstan which separately approved the list and criteria for the selection of religious items. The provision has been preserved in the same form in the current Kazakhstan Tax Code (Article 394.1.20).

For the sake of completeness of the consideration of the issue, it is necessary to mention Article 399.1.13 of the Kazakhstan Tax Code, which regulates the issues of exemption from VAT on imports of religious items, the list of which is also approved by the Government of the Republic of Kazakhstan.

For this reason, the above-mentioned document called The List and Criteria for the Selection of Religious Items, approved by Government Resolution No.174 of 6 April 2018, is of particular interest, since it was its content that significantly limited the privileged position of religious associations in the sale and import of religious items.

The said resolution contains two appendices: the first one lists certain religious items, and the second one describes five criteria for selecting such items:

  • the item is used in a religious building (structure) or premises for holding religious events outside the religious building (structure) and in their territory;
  • the item is intended for ministering, practicing a religious rite, ceremonies, or the external, internal decoration of a religious building (structure) or premises during religious events outside the religious building (structure);
  • the item belongs to the relevant religion practiced by the religious association;
  • the item was acquired by the relevant religious association;
  • the cost of one item exceeds one thousand times the monthly calculation index.

At the same time, in order to clarify the criteria by which certain items are defined as religious ones, the document includes the corresponding codes of the Unified Commodity Nomenclature of Foreign Economic Activity of the Eurasian Economic Union (TN VED EAEU), which indicates that the State takes this issue seriously and regulates its thoroughly.

However, when analysing the content of such resolution, it becomes obvious that this by-law is at odds not only with the law (the Kazakhstan Tax Code), but also with the legal principles of a religious association as an organizational and legal form of a legal entity. In addition, it seems to us that this document places an additional tax burden on religious associations and ordinary church members. The grounds for this opinion are as follows:

1. In accordance with Article 24.3 of the Law of the Republic of Kazakhstan On Legal Acts, a text of a legal act shall be set out in compliance with the norms of the literary language, legal terminology and legal technique, its provisions shall be concise, clearly convey the meaning and not be ambiguous.

The text in the analysed resolution, concerning the criteria for the selection of religious items reads as follows: "Religious items (hereinafter referred to as the "Item") imported by religious associations registered with justice authorities of the Republic of Kazakhstan, the import of which is exempt from value added tax, shall be selected according to the following criteria..."

In our opinion, such wording does not meet the requirements set. It is not clear from the meaning of the quoted text whether the item should meet one, several or all criteria at the same time. If the legislator has in mind that the item should meet all of the specified criteria, then it would be logical to put it differently: ""Religious items... shall be selected by all of the following criteria..."

Thus, it would appear that the meaning of the text of the Government Resolution does not correspond to the requirements of the Law of the Republic of Kazakhstan On Legal Acts, since it does not contain a clear meaning, paves the way for discrepancies and can be interpreted in different ways, which is unacceptable.

We should note that our analysis of the clarifications given by the government bodies regarding the interpretation of various legal situations and the interpretation of the rules governing them showed that they often do not find the proper answer themselves and ignore the questions put to them of whether or not an item falls under the established criteria [3]. We assume that the reason for such confusion of the government body is the ambiguity of the meaning of the mentioned legal act.

2. Article 399 of the Tax Code of the Republic of Kazakhstan is called Import Exempt from Value Added Tax. The literal interpretation of the heading of the article immediately allows us to highlight one of the key words – "exemption", i.e., "relieving from something" [4]. In this sense, taking into account the provisions of Article 399.13 of the Kazakhstan Tax Code, it seems that the intent of the legislator is aimed at exempting a tax subject from VAT upon import of religious items.

Thus, it is reasonable to assume that the criteria for the selection of religious items should be based solely on the fact that any particular item belongs of the material world belongs to religion.

However, contrary to the meaning of the quoted provision of the Tax Code, the Government Resolution, for some odd reason, established the cost criterion for defining an item as a religious one (Clause 5 of the Government Decree: "the cost of one item exceeds one thousand tomes the monthly calculation index").

We believe that it is not entirely correct to apply a cost criterion to religious items in general. And where the law directly establishes the exemption, it is illogical to introduce restrictions based on the cost of the item.

For comparison, the legislation of the Russian Federation regulating the exemption from taxation of religious items (Article 149.3 of the Tax Code of the Russian Federation, Resolution No.251 of the Government of the Russian Federation dated 31 March 2001) (Appendix No.2) does not provide for a cost criterion when determining a religious item. On the contrary, in addition to a more specific and expanded list of religious items, the law has established the use classification of items as:

  • temple items;
  • items necessary for ministering, practicing rites and ceremonies;
  • specialized auxiliary items required for storage, installation, operation and movement of religious items;
  • religious publishing products.

Such approaches seem to be more reasonable and consistent with both the letter and the spirit of tax legislation.

3. In accordance with the current legislation, religious associations are registered as non-profit organizations. Their activities are by nature not aimed at generating income from their activities. All income from possible entrepreneurial activity by religious associations is used to achieve statutory goals. At the same time, a significant part of the funds comes from voluntary donations from church members.

By paying VAT on the import of religious items, for example, from the Russian Federation, which are in fact religious items, but which do not meet the requirements of the Government Resolution, Kazakhstani religious associations bear an additional tax burden, which subsequently inevitably presses heavily on the members of these associations.

It should be noted that the value added tax is based on the principle of expediting the movement of goods in the economy. This principle, in our view, cannot be applied to religious items. It should be noted that even the legislator does not use the term "goods" in relation to religious items, correctly defining this separate category of taxable items as "religious items".

Thus, VAT taxation currently applied to religious items used by religious associations registered in the Republic of Kazakhstan is in direct conflict with their legal nature as an organizational and legal form of a legal entity and the corresponding statutory principles of their activities.

We believe that amendments of the tax legislation are required in terms of providing larger VAT benefits to religious associations and this has a serious social significance. Our position is heavily supported by the fact that the meaning of this tax, as you know, is to shift the tax burden onto the final consumer, who in reality pays the entire amount of such tax.

Indeed, it is quite justified and fair when the state is paid an indirect tax on the difference between the cost of a product and its selling price, which the buyer pays for the goods they acquire. But in the case of religious items, the situation is completely different, since their buyers are members of churches, mosques, and other religious organizations, who are more likely to be needy than wealthy and for whom the increase in the price of such items turns out to be considerable and causes negative attitude, resentment and misunderstanding.

We are convinced that solving many of its objectives, not only economic, but also social, the State achieves significant results if it is able to show flexibility and a differentiated approach to certain tax subjects. If the Republic of Kazakhstan asserts itself as a social state, then taking into account the above circumstances should be a generally accepted practice of the tax policy.

Religious organizations are created and legalized by the State not as commercial entities seeking material benefits, but for the realization of the constitutional rights of citizens to freedom of conscience, religion, religious belief. People seek help, sympathy, support in difficult life circumstances in these organizations, and the indisputable significance of their activities is exactly this – social service, which should be encouraged and supported by the State. In this sense, tax benefits for religious associations can become an important form of such state support.

We consider it is a short-sighted and socially harmful practice that today the State neglects such obvious conditions and formalistically sees in religious organizations only economic entities obliged to replenish the state budget. These organizations should be of interest to the State not because of their duty or ability to pay VAT, but rather of their active participation in solving state social problems!

List of sources used

1.Alibekov S.T. Tax Law of the Republic of Kazakhstan (General and Special Parts). – Almaty, 2013, p.20

2.Porokhov E.V. Legal Regime of Tax Benefits and Preferences in the Republic of Kazakhstan//electronic resource

3.Open dialogue – a blog of the Chairman of the State Revenue Committee of the Ministry of Finance of the Republic of Kazakhstan/electronic resource/

4.Dmitriy Ushakov: The Big Explanatory Dictionary of the Modern Russian Language. M: Hit-kniga Publishing House, 2017, p.570