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Taxes – government discusses hikes from 2018

 
07.07.2014

The Russian broadsheets report that the government continues to look for additional sources of budget revenue and is now discussing the idea of outright tax hikes in the next budget (and electoral) cycle, starting 2018. Details of the discussion are scarce, but according to Vedomosti, citing several unnamed sources within the government, the government is mulling the idea of raising VAT and personal income tax by 2pp each.

As oil and gas output/exports are expected to plateau and the share of lower-taxed greenfield projects is to increase, Russian budget revenues are likely to remain under pressure of shrinking oil & gas revenues (as a percentage of GDP) in the medium-term. The stream of oil & gas tax manoeuvers (which, at the end of the day, increased the tax burden on the sector), excise duty hikes and measures to improve tax collection as well as weaker RUB have so far helped to offset this.

However, as the government runs out of easy solutions, harder choices will have to be made to bring the fiscal pattern onto a sustainable medium-term path. We think there is still significant scope to scale down inefficient spending and even more room for reforming the pension system. While preferable, both are politically more complicated and so tax hikes cannot be ruled out.

On our estimates, a 2pp rise in both VAT and personal income tax might each bring 0.6% GDP worth of additional budget revenues (i.e. 1.2% of GDP altogether) which would help to smooth the shortfall in oil & gas revenues. That said, we note that for political considerations tax hikes are unlikely to be introduced before presidential elections in 2018, while the bulk of the re-armament programme is to be finished by 2020, lowering pressure on the budget.

Vladimir Kolychev, Daria Isakova
VTB Capital analyst

Tags:
Russia, tax

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