Russia set to cut VAT

Russia's government is set to slash VAT (Value added tax) from 18 to 10 per cent after Finance Minister Aleksey Kudrin reversed his opposition to lower taxes. According to experts, the move risks aggravating double-digit inflation.

On Wednesday, Kudrin met the sponsor of the VAT drive, the Union of Industrialists, which represents Russian business, and together they recommended the cut to 10 per cent. The man in charge of its economic programme is Aleksandr Murichev, Senior VP of the Union.

“In our last meeting with President Putin we insisted on a 10 per cent VAT rate because the state is incapable of regulating VAT. In Russia, VAT currently gets returned through the courts, which take years to make a decision,” he said.

But experts warned the VAT cut would spike the government's bugbear inflation without an accompanying slash in the government's budget.

“The budget would lose money because of less taxes paid to the budget. And my point is if this tax shortfall is offset by corresponding decrease in budget spending this would be fiscally neutral, and this would not have any inflationary expectations for the economy,” said Aleksandr Morozov, chief economist for HSBC in Moscow.

The hope is that the tax relief will stimulate extra funds to create an innovation economy, something in which President Putin himself added Russia lags well behind the world's most developed nations.