Russian Government considers replacing the VAT with the turnover tax

Today’s business daily Vedomosti.ru reports that the Russian Government is expected to discuss the tax reform announced by the Prime Minister Dmitry Medvedev at the beginning of December. In his statement, Medvedev emphasized his intention to discuss the possibility of introducing the turnover tax to replace the VAT. The Government will hear expert opinions at its today’s session, including that of Mr. Sergei Sinelnikov-Murylev, President of the Russian Foreign Trade Academy and the Head of the Science Council with the Gaidar Institute for Economic Policy.

According to Vedomosti.ru, Murlyev will advise against the substitution of VAT for turnover tax, as it will lower the central budget revenues and require the Government to increase other taxes. A compromise solution – reducing the VAT rate while introducing a marginal turnover tax – can hardly be efficient, as increased administrative costs will eat up any increased tax collections. According to the analysis performed by the Russian Foreign Trade Academy, at the end of 2011 as many as 156 countries, including almost all developed countries, relied on the VAT, and their number is steadily increasing. On the other hand, only 29 countries still use turnover tax, among them the United States. However, the total collected turnover tax in the USA amounts to only 2.57 percent of the GDP. Only seven countries use both the VAT and the turnover tax, including Canada, China and India. VAT in Russia brings as much as 6 percent of the GDP to the central government budget. Should the Government decide to replace the VAT with the turnover tax, the rate of the latter should be no less than 22.5 percent in order to fully substitute for the loss of VAT revenues. Introduction of the turnover tax would also remove the existing VAT tax refunds and increase the tax burden for small businesses.

Introduction of the turnover tax would not lead to redistribution of tax revenues to local administrations, which was one of the main motivations for considering its introduction. 10 regions account for more than 50 percent of the retail turnover in the country; in 2002, when the turnover tax was still in effect, only three regions accounted for more than half of its collections. Experts from the Gaidar Institute argue that instead of substituting one tax for another, the Government should consider redistribution of the existing VAT revenues to the local authorities. They propose two suggestions: either to leave between 4-6 percentage points of the 18 percent VAT to the local authorities where the VAT is generated, or to simply redistribute approximately 30 percent of total VAT collections to local authorities on a per capita basis. The first option would help mineral extracting regions with a small population, while the second would increase the revenues of densely populated regions with weaker economies. Before it considers any of the proposed suggestions, the Government will have to come up with a solution to compensate the reduction of revenues for the central budget.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s