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Taxes – media reports President Putin supports sales tax introduction

 
01.08.2014

According to Vedomosti, federal government officials met with President Vladimir Putin on Wednesday to discuss measures aimed at propping up the budget revenue base in the coming years.

To recap, the government has recently proposed two alternative initiatives to increase indirect taxation in Russia: a regional sales tax (up to 3% or 5%, according to different sources) or a 2pp hike in VAT. According to unnamed officials, the president supported the introduction of a regional sales tax.

As we have written before, the time for easy fixes to the budget policy has gone and difficult choices will have to be made sooner or later. Given the limited deficit financing options it comes down to cutting back on inefficient spending (or, rather, keeping a lid on their growth) or increasing taxes. The former involves politically complicated decisions (such as restraining soaring growth in military spending and pension system reform), while the latter would likely target the undertaxed household sector either directly (property, income tax) or indirectly (VAT, sales tax, excise duties).

We think the likelihood of tax increases next year is not large, as currency weakness has bought the government some time and there is not yet any pressing urgency to increase taxes before 2016; the general government's budget surplus over the first five months of this year was almost twice as big as last year (RUB 1,050bn vs. RUB 570bn). Moreover, next year looks particularly undesirable for tax increases in terms of timing, given the cyclical picture and stagflationary environment. This news, however, lowers our conviction, although given the vague wording in the media we would wait for final confirmation. That is likely to come before October, when the government is due to submit the 2015-17 Budget Law to the Parliament.

From the broad macroeconomic standpoint, we do not see a big difference between a VAT tax hike and the introduction of a new sales tax, although the latter would involve substantial administrative costs and is more prone to being bypassed. If the latter is implemented, that would put an additional dent in the already depressed business confidence. And given the low fiscal multiplier, its overall impact on GDP growth would be fairly negative. Moreover, the pass-through into inflation (+1.0-2.0pp to the headline CPI depending on the scope of regions and CPI items affected) would significantly complicate the shift to inflation targeting and prevent inflation expectations from being anchored, while potentially increasing risk that the government succeeds in diluting the CBR’s independence. The news creates risk to our growth, inflation and rates outlook.


VTB Capital analyst

Tags:
taxes, Russia

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