Russia Mulls Replacing VAT With Sales Tax

by Tatiana Smolenskaya, Tax-News.com, Moscow

14 September 2006

The Russian government is considering an initiative that would replace the current system of value-added tax (VAT) with a sales tax, beginning 2009, according to a senior Kremlin aide.

Arkady Dvorkovich, the head of the Expert Directorate with the Putin administration, stated during a lecture given at the Moscow International University that a switch to a sales tax would be beneficial because the current VAT system is becoming increasingly complex to administer, particularly with regard to export operations.

He also argued that VAT, along with Russia's unified social tax, removes incentives to increase labour compensation, and said that sales tax would be more suited to Russia's natural resource-based economy.

"We are coming to the conclusion that this is the right thing to do," he stated.

VAT in Russia is currently levied at 10% for 'socially important' goods such as food staples and children's clothing, and 18% for all other goods, although the government has been mulling a uniform 13% VAT rate.

Dvorkovich said that the switch to a sales tax could take place over a transition period between 2009 and 2011 without any major disruption.

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