Introduction of sales tax would be extremely undesirable

The idea of introduction of sales tax (ST) in Russia, which seemed to have finally reached back, is relevant again: the Russian Government is considering a possibility to entitle the constituent territories of the Russian Federation to introduce ST at a rate of up to 3% on their territory.

More details still remain to be revealed. Furthermore, it is not understood whether all retail and wholesale sales will be included into the ST tax base or there will be any withdrawals. ST is intended to help raise more money for regional budgets. ST revenues are expected to be about Rb 200bn annually, according to the estimates of Finance Minister of Russia Siluanov A.


Based on the past ST taxation experience in Russia and existing problems with the financial resource capacity in the regions, it is highly predictable that all or almost all constituent territories of the Russian Federation will wish to introduce a new tax. It is apparent that this measure will entail a respective increase in retail prices, especially in less competitive market sectors.


Since the regions differ largely in sales volumes, ST revenues will also be generated mostly in a limited number of regions (Moscow, Moscow Region, St. Petersburg and some others) most of which are considered as donors. Therefore, the introduction of ST is questionable in terms of its usefulness. The gap between the level of financial resource capability will be widening too.


In our opinion, the introduction of ST is extremely undesirable for some other reasons as follows:

  • The state has long been declaring that taxation system sustainability and tax burden stability is one of its principal goals in the national economic policy. The new tax will have an adverse impact on the business activity and transparency, as well as Russia’s international rankings (e.g., Doing Business).
  • Alternatively to VAT which is distributed along the entire value added chain, ST burden will be placed first of all on the ultimate consumer.
  • If a taxpayer evades taxation, the VAT will be paid to the budget at other segments of the chain, whereas ST will not be paid at all to the budget. Unlike VAT, ST has no embedded mechanisms of counteracting tax evasion.
  • ST revenues (unlike the VAT which has a wider tax base) depend largely on market-related fluctuations of retail turnover, and therefore they are unstable.
  • Growth in costs of administering the new tax may not be covered by its revenues.


VAT seems to be more preferable to ST for many parameters: not only is it neutral to foreign trade, business interests, making taxation of services and etc. more efficient, but it is also less vulnerable to tax abuses, because it has embedded mechanisms of counteracting tax evasion.


The global practice shows that VAT prevails largely over ST and there is a trend towards giving up ST in favor VAT. As a rule, as the foreign trade positions of a country get stronger and the institutional climate improves, including the quality of tax administration, ST is relinquished in favor of VAT which is more efficient.


Therefore, in our opinion, the issue of replenishing regional budgets can be addressed more effectively by increasing the VAT rate and redistributing a part of VAT revenues in favor of the constituent territories of the Russian Federation.


Svetlana Shatalova, Senior Researcher