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Why Russia's Tax Reforms Stopped
Tax reform in Russia has stopped. The government believes that a change in fiscal policy may have negative economic impacts for the country.
Why did the authorities abandon the tax maneuver and when can the issue of changing tax rates return to the agenda? Reform was postponed indefinitely, Russian business newspaper Vedomosti wrote in early December last year, citing sources in the government. The reason given was official reluctance to shift tax burdens to the population during a period consumer demand decline. In addition, higher prices can hit the poor hard. Such a shift cannot be avoided, since during discussions of the tax maneuver, the ministries were offered a reduction in insurance premiums "in exchange" for an increase in VAT. This will increase the prices for goods but also have greater negative impacts on the retail sector, which has already suffered losses in recent years as a result of a decline in consumer purchasing power.
Let us recall that discussions on tax reform have lasted almost a year in Russia. During these discussions, government representatives, experts, and businesses suggested many possibilities on how the country's fiscal system might be improved. The Ministry of Finance advocated redistributing the burden, reducing insurance premiums and raising the value-added tax. This would bring the state an additional 450 billion rubles in income as well as bringing about a likely reduction in the shadow economy, which often hides incomes in order to save on insurance payments. A reduction in the shadow economy could, in turn, lead to growth in Russia's overall economy.
However, as mentioned above, raising VAT would raise prices, affecting the purchasing power of a large number of Russians. The government is not ready to take such drastic measures in a presidential election year.
Any renewal of the discussion will likely only come post-elections. It may not come in the VAT-raising format suggested by the Ministry of Finance either. Business spoke out against the format at a congress of the influential Russian Union of Industrialists and Entrepreneurs. Vladimir Mau, the Rector of the Russian Academy of Science and Technology, has also argued that the existing fiscal system does not impede businesses in Russia. He argues instead that ensuring the sanctity of private property and the stability of the tax system as far more important. In the spring, First Deputy Prime Minister Igor Shuvalov, speaking at a meeting of the board of Russia's Ministry of Economic Development, said that it is entirely possible that there may not be any changes to the country's tax system and, if there are, they will enter into force no earlier than January 1, 2019. Igor Shuvalov was, in fact, personally approached by businessmen asking that nothing be changed in current fiscal policies. It seems that currently the authorities are listening to business.
Experts say that some tax reform is likely to be discussed. The state's commitments must be met and someone will have to pay for them. Discussion may be picked back up after the elections and without including changes to VAT. Other ways to raise additional funds might include introducing a sales tax in exchange for a current tax on moveable property. The sales tax, which has been discussed, would likely be applied regionally at the discretion of each region.
Among other proposals is the abolition of the preferential VAT rate of 10 percent for some goods. However, ideas are currently being discussed at governmental lower levels, according to Vedomosti, and the Ministry of Finance has not yet seen any proposals.
Translated by Alinga Consulting Group.
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