VAT increase in 2018

A bill for increase of VAT up to 20% was presented to the State Duma on June 16, 2018. If this bill is passed, this amendment will come into force on January 01, 2019.

Станислав Скакун, директор по экономике и финансам Интеркомп
Stanislav Skakun
Head of Finance

VAT was chosen among all taxes because it is currently the tax that is the easiest to administer. This came about thanks to the introduction of 2 software packages: VAT Automated Control System 2 and VAT Automated Control System 3. These systems help to fully automate control over the movement of funds and see, among other things, whether VAT is paid. 

The aforementioned bill will result in an increase in costs for individuals and legal entities which are not VAT payers as the price of goods and services will rise by 2%. But given that inflation in Russia is now at a record low, if there was ever a time to take such measure, this would be now with minimum inflation and efficient tax collection. These tax measures have been ideally thought through given how easily and effectively they can be implemented. 

Having said that, when VAT increase was discussed earlier, this measure used to go hand in hand with a reduction in social taxes. So we hope that what we see now is the first step in that direction, and we will see what the next step will be. Given that the retirement age has been raised and that consequently the burden on the pension fund will decrease, one is inclined to believe that opportunities will be found to reduce the rate of social taxes. 

Why is it important? There are still a number of companies in Russia operating in the “grey economy”, and although they do not pay taxes on their payroll expenses, 99% of them diligently pay VAT. Non-payment of VAT gives rise to quick consequences, while schemes for avoidance of tax on payroll expenses still exist and are still applied. In other words, social taxes are not administered as well as VAT so, if social taxes are decreased together with an increase in VAT, this basically will increase the burden on grey business and decrease the burden on “white” business. A reduction in social taxes will, of course, favorably affect “white” businesses as well as Russian companies transitioning to the “non-grey” economy. This would make for a really valid, nifty and very effective reform.