MOSCOW: Russia’s government is discussing the most far-reaching measure yet to nudge businesses out of the shadow economy with a proposal to cut the payroll tax that employers pay on salaries.
The Finance Ministry has proposed lowering the levy while increasing the value-added tax, according to three officials who asked to remain unidentified because the deliberations aren’t public. One of the officials said the measure could help authorities collect about 30 percent of the amount of salaries companies pay in cash, which the Finance Ministry has estimated is costing the government as much as 2 trillion rubles ($30.7 billion) a year in lost taxes.
Mired in the second year of recession after oil’s crash, Russia is running its widest budget deficit since 2010, with President Vladimir Putin’s government resorting to measures from spending cutbacks to sales of debt and state assets to cover a shortfall estimated at about 3 percent of output. The shadow economy, which includes illegal or undocumented trade in everything from guns and drugs to gardening, accounts for about a fifth to a quarter of gross domestic product and represents an untapped opportunity for raising tax collection. Russia’s GDP this year is projected at $1.1 trillion according to the International Monetary Fund.
“This proposal has to do with a wish to move salaries out of the shadows, to reduce the burden on entrepreneurs,” Vladimir Tikhomirov, chief economist at Moscow-based BCS Financial Group, said by phone. “The problem is that there’s a reverse side to it. The higher VAT rate will lead to faster inflation, and this decision will indirectly impact the ruble.”
The discussion was earlier reported by the Vedomosti newspaper on Friday. The Finance Ministry’s press service didn’t respond to requests for comment.
None of the tax changes are being considered for next year’s budget, one of the officials said. Putin has previously pledged not to raise the tax burden on businesses until 2018 to ensure a more favorable climate for investors while the economy is still under European and U.S. sanctions over the conflict in Ukraine.
The proposal to cut the payroll tax, including contributions employers make to fund pensions, and higher VAT will result in no additional pressure on companies, one of the officials said, declining to specify how much the levies could be changed.
