Russia’s Economic Development and Finance ministries agree to raise VAT

Russia’s Economic Development and Finance Ministries have agreed that they will have to cut taxation of labor and compensate budget losses by higher indirect taxes like value-added tax (VAT) in order to support the economy, Vedomosti daily reported on Wednesday quoting government officials.

In January, Economic Development Minister Maxim Oreshkin said that the biggest problem in the Russian taxation system is a heavy payroll, while Finance Minister Anton Siluanov said that the payroll tax stands at 30% for companies, while there is also a personal income tax, making the tax burden too heavy.

Vedomosti reported that different options of changes are under discussion, with the major one being to cut the payroll tax to 21% from 30% and to raise VAT to 21% from 18%, or to set them at 20% and 22%, 22% and 22%, or 21% and 22%, respectively, government officials told the daily adding that no final decision has been made.

According to the sources, the idea was proposed by Oreshkin and supported by Siluanov, PRIME reported.

Sources also told the daily that Oreshkin discussed a restart of the economic growth in Russia with First Deputy Prime Minister Igor Shuvalov, and among possible measures they discussed the tax maneuver, support to exports, expansion of tax preferences for innovative companies, measures to fight poverty, and changes in the personal income tax.

Associate Professor of Financial Management, Management Accounting and International Standards of Financial Activity of the Higher School of Finance and Management of RANEPA, Dmitry Tikhonov, speaking to Vestnik Kavkaza, noted that such an initiative has a number of disadvantages. "In fact, it is rather an extra run of budget money: after raising VAT it will be possible to organize additional payments to the population from the federal budget, which people will spend on the purchase of goods, more expensive because of VAT. Thus, the federal budget will be increased, but it is strong anyway, therefore, there is no particular reason to do it," the economist believes.

The increase in VAT would hit not only customers due to price increases, but also business. "Business is tired of the changes in the second part of the Tax Code - on the average, there are 16 changes each year. In this regard, major ideological changes in tax policy are undesirable for Russia. I think this proposal of the Economic Development ministry has been formed for the purpose of development, but developing one thing, one can jeopardize the other. Therefore, it is quite possible that this initiative will not work," Dmitry Tikhonov expects.

The professor of the Department of International Business at the Graduate School of Corporate Management of RANEPA, Lyudmila Dukanich, stressed that by doing so, the government intends to boost business at the expense of the population. "Social payroll taxes paid by employers, and VAT is paid by consumers. VAT is neutral for business. Manufacturer s take it to next producers or consumers in production and when VAT comes to the end of the chain, it is paid by final consumers," she said.

The expert expects that such a proposal will not be adopted in the coming year. "I think that it is unlikely before 2018. It is one of the options for further reforming of the tax system, and now these changes are not likely to be taken," Lyudmila Dukanich concluded.