''Think, think and think'': whom VAT hike hurts most

The population can finance Vladimir Putin’s ''May Decree''

''Think, think and think'': whom VAT hike hurts most Photo: Anton Zhuravlyov

The press told about the government's plans to raise the VAT rate – the main source of income of the federal budget – from 18 to 20% several days after First Vice-Premier Anton Siluanov's promise not to change taxes in the next 6 years. The fulfilment of this idea will bring not only money for Vladimir Putin's new decree; in addition, it can result in price growth and reduce the economic activity, which is already weak.

''Certain settings''

The Russians have been living in expectation of a soon rise in taxes for many months; few people doubted that some decisions in this respect would be announced immediately after the presidential election. For instance, messages about a possible rise in income tax appeared under the previous composition of the government, but authorities assured then this issue wasn't considered.

At the Saint Petersburg Economic Forum on 24 May, Minister of Finance Anton Siluanov (he's become the first vice-premier in the new government) promised taxes wouldn't change till the end of the president and the cabinet of ministers' new term. He explained stable rules were needed to increase the share of investments in GDP from 21,5% to at least 25%, which, in turn, could speed up the economy's growth to 3% a year (now it grows twice slower).

''What should the state do [for this]? Create stable conditions. First of all, it's taxes – and we are saying that we won't change taxes in the next six years of the next cycle. You will ask: 'What will change?' Undoubtedly, there will be certain setting,'' said Siluanov.

At the Saint Petersburg Economic Forum on 24 May, Minister of Finance Anton Siluanov (he's become the first vice-premier in the new government) promised taxes wouldn't change till the end of the new term of the president and the cabinet of ministers. Photo: Maksim Platonov

The concept of ''settings'' and ''rise'', however, can turn out equal: rumours about an upcoming change of value added tax (VAT) appeared less than a week after Siluanov's statement. According to Vedomosti, the government is discussing a rise in the basic tax rate from 18 to 20%. This version isn't final so far, but it's one of the most probable ones. What's more, functionaries can cancel the 10% preferential tax rate, which is now applied while selling medication, printed media, breeding stock and some goods for kids. The Ministry of Finance offers to substitute the concession for benefit.

By raising VAT, the new government allegedly hopes to find the money for Vladimir Putin's ''May Decree'' – an increased tax rate can give the budget about 2 trillion rubles for 6 years. In total, the decree will need some 25 trillion rubles (the most part of this money has already been included to the budget), while the strategic tasks given by Putin will cost 8 trillion rubles, Primer Dmitry Medvedev said previously.

Today VAT is one of the main sources of income of the federal budget. In 2016, its share in the general structure of incomes was 39,1% (it's 5,2 trillion rubles), one year earlier – it was 21,8% (a bit less than 3 trillion rubles).

Functionaries can cancel the preferential tax rate of 10%, which is now applied while selling medication, printed media, breeding stock and some goods for kids. Photo: Roman Khasayev

''The rest is quite complicated''

If authorities decide to raise VAT, it will certainly be painful for end consumers, says RANEPA professor and taxation specialist Lyudmila Dukanich. The formation of this tax is so that it's neutral for enterprises – enterprises just turn it into prices. According to Dukanich, practice shows that higher VAT almost always boosts inflation – ''it has already repeatedly been observed''

A simultaneous cancellation of concessions with the rise in the main rate brings greater pessimism. Their lost can be compensated through direct benefits. But now it's unclear who will get them and whether they will be able to make up for the losses.

Perhaps, from a perspective of the tactical fiscal task, the financing of ''May Decrees'', the rise in VAT can be considered as an effective step. However, Dukanich warns there aren't any guarantees this won't lead to a reverse effect – a reduction of consumption and shrinkage of tax space: ''I think this will seriously affect quite a wide circle of the population with the current level of life, not only the poor but also people with an average living standards. From my point of view, they still need to think, think and think about it.''

The VAT rise is considered because this tax is administered best – ''a mouse won't get away'', says senior economist of Expert RA Anton Tabakh. If this idea becomes a reality, the economic activity can really slow down a bit. However, ''it's impossible to solve everything with prices'', he thinks: the effect of the increased rate will be distributed between the end price for consumers and margin of producers. In addition, the very influence of the tax on prices is regulated by the change of interest rates in the economy.

The VAT rise is considered because this tax is administered best – ''a mouse won't get away'', says senior economist of Expert RA Anton Tabakh. Photo: tabakh.ru

How inflation will react to the tax increase depends on what will happen to concessions as well as actions of the Central Bank. The experience of countries that have recently increased VAT (for instance, Georgia) shows that changing the rate by 2 percentage points can raise the price level by 0,5-0,75%.

''Everything in this world is interconnected. If others didn't do anything, the VAT rise would be included in prices. But as others will also take certain measures, the effect won't be so clear. In general,'' Tabakh continues, ''the VAT increase is one of the easiest ways to find money for a new infrastructural programme. The growth of government borrowings is another way. The rest is quite complicated.''

By Artyom Malyutin