Working Paper: NBER ID: w15615
Authors: Vera Kononova; John Whalley
Abstract: We discuss recent policy debate in Russia on moving from the present value added tax to a sales tax structure covering households, government and exports. What is distinctive in this debate is the range and nature of problems identified with the VAT, most of which stem from its multistage credit-invoice mechanism. These include false credit and refund claims, delays and difficulties in obtaining legitimate input credits and refunds reflecting responses of tax authorities to false claims, difficulties for large firms dealing with small firms, and resulting uneven effective tax rates between energy and manufacturing sectors. For the Russian economy being heavily dependent on oil and gas exports and seeking diversification, the VAT effectively places industrial companies at a significant disadvantage, particularly compared to exporters of energy resources. These problems are all intensified by the relatively high statutory rate of 18% in the Russian VAT. \n \nWe describe and document the debate, discussing in detail what the perceived Russian problems with the VAT are. We suggest that many of the difficulties reflect the multi staging in the credit-invoice mechanism in the VAT, rather than the VAT per se. We discuss the possible use of the subtraction and addition methods in the VAT as an alternative to the sales tax proposed. We also report estimates of possible changes in effective tax rates across sectors if the sales tax were enacted. \n \nThe final outcome of this debate is not yet known. A special commission of the Presidential Executive Office of the Russian Federation was to report on the matter in 2009, however, due to the economic crisis a decision on VAT/sales tax has been postponed. Despite this, in the near future a change to a sales tax could possibly follow. We suggest that were this to occur this would be a precedent setting move away from the value added tax. With IMF and World Bank conditionality no longer the force that it was for policy change in large economies such as Russia, India, China and Brazil, similar re-examinations could follow elsewhere.
Keywords: VAT; Sales Tax; Russia; Tax Reform
JEL Codes: H2; H25; H26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| multi-stage credit-invoice VAT system in Russia (H25) | significant administrative burdens and compliance costs for businesses (K23) |
| significant administrative burdens and compliance costs for businesses (K23) | hampers economic growth (F69) |
| switching to a single-stage sales tax (H29) | reduce administrative burdens and lower compliance costs (K23) |
| switching to a single-stage sales tax (H29) | foster greater economic diversification (O29) |
| inefficiencies associated with false credit claims and complexities of obtaining legitimate refunds (H26) | uneven playing field between different sectors (O17) |
| uneven playing field between different sectors (O17) | disadvantages manufacturing compared to energy exports (F14) |
| transition to sales tax (H25) | budgetary losses and challenges in tax administration (H26) |