Discussion of tax reform in Russia to be delayed by one year

The government did not take any decisions after yesterday’s discussion of the tax reform proposed by the FinMin, officials commented for Vedomosti Daily. According to unofficial reports it was agreed that no bills will be prepared this year and discussion will be left to 2018, although the issue remains on the agenda. Apparently disagreements within the government remain and we expect that discussion of unpopular measures will not be encouraged before the presidential elections. It was also agreed that the tax reform should be considered as part of a broader reform package, which is yet to be prepared.

The FinMin proposal is to increase the VAT rate to 22% and reduce social contributions also to 22%. The measure aims to stimulate exports by shifting the tax burden toward consumption and also reduce the share of the gray economy. The ministry expects a positive effect from the budget and a large RUB 500bn effect from reducing the share of the gray economy. On the other hand, the proposed reform will destroy the pension system and make it entirely dependent on the federal budget, which is a step in the wrong direction according to the social bloc in the government. Critics also point that estimates of the positive effects from whitening of the economy are exaggerated. The delay of the tax reform is positive for CBR monetary policy as the bank already mentioned a possible indirect tax hike as a risk to inflation due to second round effects.

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