Simultaneously Collecting VAT and Sales Tax is Inexpedient

The economic block of the government discusses the idea of returning the sales tax which can become an alternative to raising the VAT rate during the tax maneuver. In order to circumvent the decision of the Constitutional Court of the Russian Federation that rules out simultaneous introduction of two taxes with a similar tax base, the tax is called “trade duty” in the propositions.

The difference between the trade duty currently charged in Moscow and the sales tax is a limited type of activity for the first one as well as the tax base (in Moscow, the trade duty is charged on the floor space of a trade object while the sales tax – on retail sales volume).

According to the Gaidar Institute estimates, introducing sales tax with a rate of 2 to 5% would bring 0.3–0.8% of GDP (in the conditions of 2015 and at a collection rate similar to that of VAT). Moscow would receive 15.6% of these revenues, the Moscow region – 6.3%, Krasnodar Krai and St. Petersburg – 4.2% each. A little more than two dozen regions of the country will take the most advantage from using this tax (20 regions with the largest retail turnover would receive 2/3 of all yields), and a large part of them are currently donor regions.

However, the simultaneous collection of VAT and sales tax is unlikely to be expedient for a number of reasons. First, the increased costs of administering the two taxes will not be compensated by a noticeable increase in tax revenues. Second, introducing additional sales tax in regions without reducing the VAT rate will lead either to increased tax burden or to the need to further reduce the regional profit tax rate in order to redistribute the tax burden on consumption. Third, it can lead to higher prices in consumer market sectors with a low level of competition.

Moreover, the sales tax carries high risks of abuse, since, unlike VAT, it does not have embedded mechanisms to counter fraudulent schemes (such as an invoicing system, documenting costs and revenues for calculating tax liabilities, control at all stages of goods distribution, etc.), and its collectability will directly depend on the discipline of small and medium-sized businesses when using cash register equipment. The decision to impose sales tax in addition to VAT can also adversely affect Russia’s position in the Doing Business rating by the criteria related to compliance with the established requirements (time and cost indicators) because of the state’s and business’s raised costs due to administering two taxes at the same time.

The international practice of collecting both taxes doesn’t speak in favor of introducing regional sales tax in addition to VAT – as of the end of 2016, only 9 countries used a partial combination of VAT and sales tax analogues: Canada, China, India, Indonesia, Chile, Tunisia, Turkey, Norway, and Djibouti. That said, revenues from the sales tax looked insignificant compared to VAT revenues: for example, in Canada in 2014, the share of VAT revenues amounted to 4.2% of GDP while that of the sales tax – to 0.1% of GDP.

At the same time, in a number of countries, there has been a trend towards gradually abolishing the sales tax while preserving only VAT. This is due to complications related to administering two taxes, low revenues from the sales tax compared to VAT which has a broader tax base, the inhibition of domestic demand because of the excess tax burden at the final consumption stage, and recognizing that sales tax has higher abuse risks.

Ilya Sokolov – Head of RANEPA Laboratory of Budgetary Policy