A limited maneuver: what will the unification of VAT rates and insurance premiums

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Proposed by the Ministry of economic development and the Ministry of Finance tax reform can boost investment activity in the food industry and the textile industry, but industries with a high share of wages in costs is likely to lose

Monday, March 13, in the framework of Russian business Week, Russian Union of Industrialists and entrepreneurs (RSPP), the Minister of Finance Anton Siluanov spoke about his perspective on the reconfiguration of the tax system. Siluanov estimated the tax reform proposed by the Minister of economic development Maxim Oreshkin. Its essence is the exchange of reducing aggregate rates of insurance contributions (with the simultaneous abolition of the limit values of wages, after reaching which the stakes are plummeting) to increase the VAT rate. Ministry of economic development proposes to fix both rates and fees, and VAT at 21%. Siluanov proposed to slightly adjust this formula to set rates at 22%. Treasury estimates suggested his Best option will lead to significant loss of revenue for the consolidated budget including extra-budgetary funds, while the rate of 22% will be budget neutral.

Just note that, by calculations of authors of the scenario of the “21/21” leads to the loss of about 200 billion rubles a year (for previously announced Ministry of economic development — about 550 billion rubles), while the scenario “22/22” will add to the Treasury about 100 billion rubles (in the scale of the budget slightly, that is, confirms the assessment on neutrality).

It promises the Ministry of Finance

It is assumed that the maneuver to reduce the tax burden on wage Fund and transferring it to the consumer, will be beneficial for almost all industries (except for their gray and black segments) and particularly for exporters.

Such expectations are based on the fact that all honest taxpayers benefit by reducing the high loading on the wage Fund, and exporters gain a competitive advantage because they do not pay VAT and the rate increase will not affect them.

Additionally, the Ministry of Finance expects a decline in payroll as burden on the wage Fund will be accessible to a larger number of companies.

Among the negative effects of the maneuver Anton Siluanov allocates one-time jump in inflation, estimating its value at 2 p. p.

What the media says

The maneuver is certainly true, at least in theory, the goal of reducing excessive for fair, white business fiscal burden on salaries. However, there are reasons to assume that declared the maneuver, the goal is not completely reaches
due to a number of “side” effects, which remain outside the field of public discussion.

Let’s consider the “good news” — about the decline in tariff rates of contributions. First, in practice for a number of business segments and industries announced rate reduction will result, paradoxically, its growth. And first of all affected enterprises with the most highly qualified specialists who create products with high added value, and thus with a high proportion of salaries in the cost structure.

The fact that the current base rate of 30% is levied only on salary on hand (minus the pit), not in excess of 55 thousand rubles. Income over the threshold is taxed at a lower rate of 27.1% excluding payments in social insurance Fund (SIF). And all that is over 63 thousand rubles, at the rate of 15.1%, taking into account the reduction of payments to the pension Fund from 22% to 10%. As a result of effective load (i.e. the ratio of contributions paid to the salary) with the increase of the income of the employee is reduced. Therefore, the average effective rate of insurance contributions in Russia is not known to all 30% and less than 27%.

Given that the Finance Ministry’s proposal is to reduce the rate from 30% to 22% and the abolition of the threshold contributions to the pension Fund and social insurance Fund (HIF from 2015, the threshold has been abolished), the average effective contribution rate will definitely decline, with average 27% to 22%, however for different companies the effect will be different. So, those employers who were paying employees a high salary (more than 135 thousand RUB in a month) will receive a greater burden on the wage Fund.

The abolition of the threshold completely “kill” the already obvious already, the insurance nature of such payments: the contributions to the pension Fund at the rate of 10% goes to the “common pot” and not in any degree do not increase the pension of the employee. And the medical care if dependent on wages, it is likely inversely proportional to it (the higher the income, the more healthy, other things being equal, is an employee and the more likely it will be treated under the program LCA or just for money). Only contributions to the social insurance Fund have still kept their insurance character.

The other side of the maneuver, the rate increase of VAT, also carries some implicit effects. In addition to rising inflation, estimated still more to 3.5 percentage points (the VAT rise is always almost fully shifted to consumers, and thus the growth rate from the current 18% to a claimed 22% of the price of almost any commodity will grow with conditional paragraphs 118 to 122), the tangible negative effect is expected, ironically, for companies to pay VAT should not. It is exempt from VAT payers in the regimes (small and part of medium business), as well as those who carry out activities not subject to VAT.

These “defaulters” cannot offset input VAT against “outgoing” (as the usual manufacturers and sellers), or to refund it from the budget (as exporters) and therefore include paid to suppliers VAT (for example, payment of rent, purchase of materials) in expenses along with a “clean” price of the goods or services. In this regard, the increase in VAT rates will lead to a direct increase in costs of such persons and a substantial portion of these costs will be charged to the profit.

The real effect of the maneuver

We can expect that eventually the economy will feel a positive effect from the increase of investment opportunities of entrepreneurs, whose share of expenditure on labour costs (and hence premiums) are significant, and the salary is low.

Part of the savings, of course, sooner or later have to be directed to the indexation of salaries. And yet the higher the share of wages in total costs and the lower the salaries, the more money you can use for development. As an example, industries that can benefit from a maneuver, can result in food manufacturing, textile manufacturing is quite labor-intensive industry with low wages.

But for some companies and industries maneuver will have negative consequences. Among the “losing” can be observed in medicine, passenger transportation, consulting and engineering companies — particularly those that carry out special research and development (VAT-free). At the same time, the IT industry, where traditionally high salaries and a portion of VAT deductible will definitely feel the effect from the VAT rate increase, however, in respect of social contributions, she “protected” the current low interest rate (14% vs 30%). And while maintaining this benefit (directly approved by the President and, therefore, protected from any maneuvers), you can expect IT to maintain a “comfortable” level of fiscal burden.

A false start tax reform

It is worth noting that the Ministry of Finance and Ministry of economic development, probably consciously playing ahead of the curve, given the point made in the December 2016 in the presidential address to the Federal Assembly instructed to discuss donaustrasse tax system after 2018.

On the one hand, the reaction rate is to be welcomed: the faster will be implemented economic stimulus measures, the better. However there’s a drawback: the proposed manoeuvre — even if its maximum efficiency is not the complex ponastroili tax system, which is required.

Obviously, reforming the tax and is closely related to it budget systems need more than a game with only two, albeit important, parameters, and even if you wish to lose at least some revenues. We still need to discuss the fate of the income tax (should the investment loans, to modernize the procedure of depreciation, etc.), NDFL (whether differentiated rate, new benefits, etc.), intergovernmental transactions, including the consolidation of the regions of the old tax revenue and new powers.

But if the proposed maneuver quickly agreed and adopted, all further proposals for reform of the tax and budgetary systems will face additional significant constraint: in addition to standard for Russia “can not reduce the budget revenues” add new: “we will not discuss the rate and method of calculating contributions and VAT — it just came out”.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.

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