Sergei Hestanov: "VAT rate hike to affect all sectors of economy"

Russia's State Duma passed the bill on raising value-added tax (VAT) to 20% from 18% in the third and final reading. The changes will come into force on January 1, 2019 and, according to the government's calculations, will bring to the federal budget additional 620 billion rubles (about $9.8 billion) per year. The advisor on macroeconomics to the CEO of the 'Opening-Broker' brokerage house, Sergey Hestanov, told Vestnik Kavkaza about how the VAT rate hike will affect the Russian economy and how it will affect ordinary Russians and entrepreneurs.

- Has the law been changed between the second and third readings?

- There have been no dramatic changes. It is noteworthy that the law was adopted very quickly, there was a small period of time between the first and the third readings. Of course, no significant amendments were made in the meantime that would change the law.

- What would the VAT rate hike do for the Russian economy and the country's budget?

- First of all, it will bring some additional 600 billion rubles to the federal budget per year. Strictly speaking, that is why this law was adopted. Unfortunately, because of it we will have an increased inflation and the slowdown in economic growth. Estimates vary, but the inflation rate will probably be about 1.5%. It is difficult to say how much it will slow down economic growth, but an estimated reasonable rate is between 0.5 and 1 per cent. Therefore, given that oil prices are quite high now, many experts consider this decision as ambiguous.

- Which sectors of the economy will be most affected by the VAT rate hike?

- The fact is that VAT is the tax, which it is easy to manage and which is paid by almost everyone. Therefore, to a greater or lesser extent it will affect all sectors. Relatively often, a reduced VAT is applied to food products and medicines. Almost all other commodity groups are likely to be affected by this tax rate hike.

- Will the VAT rate hike affect the level of inflation and the rise in prices of basic commodities?

- Most likely, the price of the majority of goods will rise by 1-1.5%. Unfortunately, it is difficult to predict with high accuracy the increase in the cost. Since there are  different intermediate products in production chains, then, respectively, they will contribute differently to the increase in the final price. The greater the content of intermediate products related to the preferential rate, the higher the price, and vice versa.

- Russia's Tatyana Golikova Deputy Prime Minister promised that the VAT rate hike will not affect the rate for socially important goods, which is set at 10%. Is the VAT rate hike able to indirectly increase their cost?

- The fact is that most of the preferential VAT rates are applied to socially important goods. But any goods use transport services, any goods use electricity, any goods use some intermediate products that fall under the usual taxation. Therefore, the price increase will affect all important groups indirectly.

- May the new VAT rate be to high for small businesses?

- It is important to understand that the VAT rate hike by 2% is an unpleasant measure, of course, but it can hardly be called catastrophic. The majority of business has a certain margin of profitability. Moreover, most likely the VAT rate hike will somehow be transferred to the end user. Therefore, this is a rather significant burden not so much for business, but for citizens.