Russian Finance Ministry to raise VAT, cutting social security tax

Russia is considering raising value added tax but lowering mandatory social security payments, the country's Finance Minister Anton Siluanov said today, speaking at an economic conference in Moscow.

Siluanov said his ministry was proposing cutting mandatory social security payments, which employers pay on every employee, to 22 % from their current level of 30%.

Value added tax, which is regarded as a tax on consumers, should be raised at the same time to 22% from 18%, Siluanov noted.

Such changes could spark a one-off 2% increase in consumer inflation, he said.

"According to our calculations, that would be neutral for the budget," Reuters cited Siluanov as saying.

He did not say when the proposed changes might be introduced, describing the ideas as suggestions. His ministry wanted to avoid an increase in spending so as not to raise the overall tax burden, he said.

A professor at the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, speaking to Vestnik Kavkaza, expressed doubts about the expediency of such a replacement, since social security payments are made for people who have not reached the retirement age, and VAT is paid by all citizens of the country. "That is, it turns out that both pensioners and children will pay for active workers, which is a very unequal substitute," the expert believes.

At the same time, he noted that the conditions for Russian business will worsen. "VAT is an indirect tax, taken from the turnover, so it will be unprofitable for business: prices will increase in all parts of the business chain. For Russia, even 18% VAT is too high, experts constantly emphasize that it must be reduced to at least 16%. Because of this, we will get a shift in the tax burden on the population," Alexander Abramov explained.

An associate professor of Stock Markets and Financial Engineering of RANEPA, Vasiliy Yakimkin, also drew attention to the urgent need to reduce social security payments for business development. "On the one hand, competition is on the rise, so reduced taxes is a good thing. On the other hand, it will be a two-fold situation: it will make it easier for businesses to develop, but prices for goods will rise, which means the decline in demand, "the expert said.

First of all, the growth of VAT will hit the less protected segments of the population. "At the same time, the secured ones will not notice growing prices increase because their niches are least susceptible to negative effects from the proposed measure," Vasily Yakimkin warned.

According to him, the government "needs to get the business out of the shadows, create preferences so that it would be profitable to get right with the law. If these problems are solved, the positive effect will be higher than from the decline in social security payments. Also it is necessary to lend to small and medium business at 4-5% - then we could expect real economic growth," the associate professor of Stock Markets and Financial Engineering of RANEPA concluded.