Replacement of VAT with sales tax may worsen the conditions for business in Russia, experts say

Replacement of value-added tax (VAT) with sales tax will hardly facilitate business operations in Russia, and it might worsen the economic situation. However, experts believe that the discussion of this subject may stimulate the Government to adopt other and more important decisions in the tax sphere.

The Prime Minister of the Russian Federation Dmitry Medvedev suggested considering this matter again Tuesday at the meeting with the representatives of the RUIB. The general directive from the Chairman of the Government remains the same: tax pressure on the business as a whole is not to be increased.

D.Medvedev had suggested discussing the idea of revocation of VAT and its replacement with sales tax during his days as President. The Ministry of Economic Development supported the Presidential initiative while the Ministry of Finance strongly opposed it, claiming the easiness of administration and stable growth of proceeds from VAT.

Alexander Murychev, First Executive Vice-President of the RUIB, said to PRIME agency that businessmen are disposed to discuss with the state any changes to the tax sphere, but VAT is not the chief problem of the Russian business.

He said: “If you ask me, not as an official, but as an expert, I say that I do not see how this is important in any way now. In principle, even according to the latest research, entrepreneurs agree that VAT and administration of VAT are somewhat improving. This makes us content”.

A.Murychev is convinced that high rates of obligatory insurance payments, reaching 30% of the salary funds, create more obstacles for business. He stated: ”Of course, they are too high, and this load is pretty heavy for business, especially for small and medium ventures”.

According to the Vice-President of the RUIB, large industrial ventures are unable to cope with the tariffs of obligatory insurance of dangerous industries. A.Murychev says:”We have said since the start that such figures are inadequate. Thank God, the Government understands that such figures need to be reviewed”.

He stressed: “The rest should and needs to be discussed, but this is the most important”.

Igor Nikolaev, Director of Strategic Analysis of the FAC, believes that now is not the best moment to discuss serious tax changes. He claimed: “It is difficult to find a more inappropriate moment, I think. The indecisiveness in the economy is growing; or rather the world economy as well as the Russian economy is submerging into the second wave of the crisis. If we initiate such a serious tax reformation, the indecisiveness will grow even further, and this will lower our investment attractiveness”.

The expert is of the opinion that the investors need stability and predictability of the tax system. He said: “The itch of tax reformation, especially in a satiation like this, should be calmed”.

Oxana Dmitrieva, a member of the State Duma Budget and Taxes Committee, believes that there is no need to revoke VAT but rather to decrease it from 18% to 10%, which would be useful.

A.Dmitireva said: “If we revoke it now and compensate for it by some other taxes, this will be too much. First, the rate will be too high, second, this will oppress the final manufacturer: the closer to the end of the technology cycle, the higher the payment”.

She elaborated: “I also think that this would be a stimulation of the imported goods: as if lowering of import duties were not enough, we are revoking VAT”.

According to the Deputy, the Government needs to modify its approach to the taxation. O.Dmitrieva declares: “First – preferential benefits for those spheres, where we want to make a structural progress, should be considered. Second – doubtlessly, the system of progressive taxation should be implemented in order to readjust the tax pressure”.

Maxim Rovinskiy, Head of Tax and Customs Practice of the Law Firm "YUST", believes that if VAT is replaced, and not supplemented, as it had occurred in Russia before, with sales tax, its rates cannot be much lower than the current VAT rate (18% and 10%).

He noted: “In my opinion, this will cause discontent in the society, because sales tax is always more “visible” for the consumer. And I think that there will be as many abuses with sales law, since the seller will feel more inclined to avoid the tax, which will receive avid support from the purchaser”. M.Rovinskiy added that he does not find it useful to create instability in taxation, especially “replacing a finer tax instrument with a more archaic one”.

Sergey Shatalov, State Secretary, Deputy Minister of Finance of Russia, said that the Government will discuss the subject on December 26.

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