Russia rules out early cut in VAT

Russian manufacturers have long complained that Value Added Tax (VAT) in the country is too high. However, Finance Minister Aleksey Kudrin says it’s too early to talk about cutting it. His remark sparked heated discussion at a tax conference on Wednesday.

Just days after President Dmitry Medvedev sent his budget message, with tax reform policy at the top of the agenda, leading economists got together to discuss this hot topic. Cutting VAT was the most controversial matter.

VAT currently stands at 18 per cent. The Russian Union of Industrialists and Entrepreneurs is convinced it’s too high and makes Russian products uncompetitive in the shops.

Aleksandr Murychyov, Vice President of the Union, said it’s necessary to cut VAT to 10 per cent.

“It would help release huge resources of up to a trillion roubles. Part of this cash could go on new equipment and the introduction of new technology. This would allow the creation of more small and medium enterprises and follow the course of diversification of the economy away from the needs of the oil sector.”

But the Ministry of Economic Development is less radical and proposes to cut VAT to 12-13%. Financial Minister Aleksey Kudrin, however, called the whole idea of VAT reduction destructive and premature.

“A reduction in VAT now would force a postponement of other tax initiatives. The authorities must improve the quality of VAT administration. The share of VAT in the gross domestic product will stay at 3.7 per cent,” he said.

What all sides unconditionally agree upon is that a country as sensitive to commodity price fluctuations as Russia must have the most stable tax policy possible.

Meanwhile, both government officials and business leaders welcomed Kudrin’s news that Russia's oil industry is likely to benefit from more tax cuts in the near future.