Minister of Finance of the Russian Federation Alexey Kudrin
Photo: Mikhail Razuvaev
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VAT Hugely Undercollected
Russian Finance Minister Alexey Kudrin will attempt to explain to Prime Minister Mikhail Fradkov at a meeting of the government today why the VAT collection plan is be unmet this year. Kudrin will blame the problem on amendments made to the Tax Code that came into effect this year. There were no plans for the government to discuss VAT this year since all amendments to the Tax Code are in place, include one that will affect exporters next year. The problems with tax collection arose unexpectedly. While income from all other forms of taxation are rising (profits tax collection in the first nine months of this year was 40 percent higher than in the same period of 2005), VAT collection is falling. The 2006 budget foresees 1.124 trillion rubles in VAT income, but the Finance Ministry expects the real sum collected to be 958 million rubles. The difference is $6 billion.
Kudrin will explain today that the problem arises from the conversion at the beginning of the year to a system of payment and return of VAT at the time of shipment of goods, instead of the time of payment for them, as previously to this year. The Finance Ministry is not claiming that the new system has led to increasing criminal schemes, but sees a “break” between the time the tax is calculated and the time it is received that will be compensated for later. The Federal Tax Service is concerned that taxes may now be calculated on deals that later proves to be fictitious.
Another cause for undercollection is that VAT is now calculated monthly on capital investment instead of when the object of investment is put into use. The 60-percent increase in VAT returns to exporters, compared to last year, will also be mentioned, and attributed not to the greater “sensitivity” of tax officials, since exporters still have to apply to a court to receive that refund, but to increasing volumes of export and growing prices for natural gas, oil and metals.
The Finance Ministry does not fault itself for the situation. “The Finance Ministry obviously erred in its prognoses and now it is suggesting that a transition period has to be tolerated,” Sergey Belyakov, deputy chairman of the Russian Union of Industrialists and Entrepreneurs tax policy committee, told Kommersant. “In reality, that means that it is foisting its problems on entrepreneurs. The thing is that, because of the failure in VAT collection, tax organs everywhere are now refusing to make legal refunds to companies. Often they ignore court decisions in the taxpayers favor.”
The Finance Ministry is using the current situation to propose new amendments to the Tax Code on VAT. It wants to implement special registration procedures for VAT payers beginning in 2008 and to limit the right to pay the tax and receive a refund on it to companies that have been active more than a year and that have a minimum turnover, which has not been specified yet. Several European Union countries have similar practices. Deputy Finance Minister has told Kommersant that the minimum may be 300,000-400,000 rubles. Analysts say that the new Finance Ministry proposals are not beneficial to small businesses. They will loss a tax deduction and that increased expense will be passed on to their customers.
The Finance Ministry says that the VAT collection problems “may have an influence on the level of income until 2008.”
Vadim Visloguzov
All the Article in Russian as of Nov. 23, 2006
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