Evaluation of tax breaks and exemption may become a part of the budgetary process in the Russian Federation

In September 2018, the Government of Russia submitted a draft of the federal law envisaging evaluation of the shortfall in budget revenues from tax breaks and exemption as well as their control in the budgetary process along with direct budgetary expenditures, to the State Duma of the Russian Federation. These amounts will be accounted as tax expenditures.

Alternatively to direct budget expenditures, savings on tax and assimilated thereto payments make the source of tax expenditures leading to the increase in value of cash remained at the disposal of tax - payers as a result of existing tax incentives. These savings are actually financed by the State through reduction of tax burden on certain categories of tax - payers and equivalent to a partial loss of income, which could have been otherwise received in the absence of tax breaks and exemption in the State legislation, as providing incentives under tax policy the State reject a certain portion of tax revenues in favor of tax - payers. However, tax breaks and exemption serve as measures of tax policy introduced to assist the accelerated development of the economy of certain territories, stimulate specific types of economic activity, provide support to disadvantaged social groups, i.e. they are intended likewise direct budget expenditures to achieve the goals of social – economic development. In fact, tax incentives are mechanisms of indirect financing of these or other public policy areas including different programs and projects and therefore, use of such incentives by tax - payers lead to the State expenditures financed in this case through the tax system. 

In this regard, it is suggested to maintain an annual mandatory evaluation of tax expenditures on every level of budgetary system, i.e. federal budget, budgets of the subjects of the Russian Federation, local budgets, in the context of governmental (municipal) programs and their structural elements and spheres of activity not relevant to governmental (municipal) programs. It is envisaged that the Government of Russia will formulate the procedure of evaluation on the federal level while the  highest executive regional authority and local administration will do it on the regional and local level respectively, however, according to general federal requirements.

As the draft law stipulates, the assessment report on tax expenditures of the Russian Federation based on the gathered findings will be prepared for the accounting, current and next fiscal year and planning period. This report will be included in the list of documents and materials to be submitted to the State Duma by the Government of Russia along with the draft of the federal law on the federal budget for the next fiscal year and planning period.

At the same time, practical implementation of the results of tax expenditures’ assessment will be expanded as it will be used in conjunction as follows: 1) to consider draft budgets at various levels of the budgetary system; 2) to prepare main areas of budget, tax and customs and tariff policy of the Russian Federation and similar documents on the regional and municipal level; 3) to determine the effectiveness of governmental and municipal programs; 4) to draw conclusions on the effectiveness of tax breaks and exemption.

It has also to be mentioned that shortfall in revenues received from privileges and exemption related not only to taxes and levies but also to customs duties shall be referred to tax expenses, so that assessment shall be complete and full – fledged and reflect the amount of resources spent by the State.

Currently, it is expected that results of the evaluation of tax expenditures will be taken into account already in the course of consideration of the draft of federal budget for the period of 2020–2022, i.e. it is suggested to launch this  mechanism into operation in the coming years. Its introduction will be an important step in the development of local practices of financial management with the improvement of efficiency of budget allocation, quality of budgetary forecasting and a more rational use of tax incentives among the most significant advantages.

Vladimir Gromov, Candidate of Economic Sciences, Senior Researcher, RANEPA Tax Policy Department