| Incredibly, taxpayers and legislators wholeheartedly believe
that scrapping the sales tax will make life easier for customers.
A Trap for Credulous People
The story surrounding the abolition of the sales tax is the brightest
example of the surprising credulity of both Russian taxpayers and Russian
Anyone who toured the shops after New Years Day must have noticed price
rises, small for some goods and more pronounced for others. In the shops,
both big and small, in my part of St. Petersburg, I saw that tea, coffee,
sugar and fruit juices cost a rouble or two more; the prices of vegetables
were 50% higher; those of sausages and smoked foods, five to 10 percent
higher. Price rises were also visible for mobile phones, video cassette
players, footwear, and books.
"How come?" the intelligent reader will rightly wonder. "The
sales tax was abolished on January 1, 2004. So consumer items should cost
five percent less, shouldn’t they?" A person better versed
in tax law would cite Article 354 of the Tax Code, which reads: "The
sales tax sum shall be included by the taxpayer in the price of the goods
(works, services) to be paid for by the buyer (customer, sender)."
This implies that the abolition of the sales tax should have brought prices
A consumer market analyst will have recalled that in summer 2003, when
a group of State Duma deputies proposed retaining the sales tax as a key
source of funds for regional budgets, the managers of such retail chains
as M. Video, Kopeika, Pyaterochka, and IKEA guaranteed that if the sales
tax was abolished, they would lower their retail prices. It was the promise
of lower retail prices that had served as the government’s main
argument in the drive to scrap the tax. You may recall that First Deputy
Finance Minister Sergei Shatalov predicted: "Lower prices across-the-board"
would add 1,000 roubles to the budget of every Russian family in the course
of 2004. What a lot of baloney.
The sales tax was introduced in 1999. At the time the government declared
that it would compensate the regions for the lower revenues they would
receive owing to a reduction in value-added tax from 25 percent to 15
percent. However, the sales tax, whose rate was set by the regional authorities
but was not to exceed five percent, had been introduced on the understanding
that it would be effective until early 2004.
Most regions naturally promptly enforced the tax, and did so at the
maximum rate that jacked up all prices by five per cent. What has happened
now? Traders are of course reluctant to lose profits, and practically
none of them has cut prices after the abolition of the sales tax. The
tax no longer exists; yet the law has no coercive mechanism to force traders
to reduce their prices accordingly. Nor is there any device to punish
them for failing to deliver on their promises.
We are being given a multitude of reasons why prices haven’t gone
down, ranging from inflation to the strengthening euro. Some traders claim
that they are selling in January goods they received before the sales
tax was abolished, implying that they paid the tax on the goods. They
are not telling the truth. Inflation couldn’t have been five percent
in early January. The transfer of sales tax payments to the state budget,
according to the Tax Code, takes place on a monthly basis, after the sale
of the goods, a fact that belies trader claims that they received the
goods before the abolition of the sales tax. Finally, things like dill,
parsley, fruit juices and Russian-language books are not imported from
Europe; so the euro exchange rate to the rouble is irrelevant for these
A generous two percent reduction in VAT
Most importantly the "tax cuts" for 2004 included a VAT cut
from 20% to 18%. In theory, the reduction of this tax was also supposed
to appreciably diminish the prices of VAT-assessable goods and services.
In practice, however, this is unlikely to happen for the same reasons.
Traders cannot be forced to cut their prices accordingly, nor can they
be punished for refusing to do so. Besides, a two-percent VAT cut will
have little, if any, effect on consumer prices, and therefore will not
be appreciated by the citizenry. It will be felt only by big companies
with turnover running into billions: paying two percent less VAT amounts
to a large increase in their profits.
The 15% excise on natural gas has also been scrapped, which in theory
should lead to lower gas prices. We can count on that because the prices
of gas sold to the households are subject to state control. But the share
of gas in citizen’s total expenses is so small that the cut in gas
prices will not make their purses much fuller.
On the contrary, their purses will be set back considerably because
January 1 saw an increase in excise duties on practically all consumer
items - from spirits and other alcoholic beverages to cars and gasoline.
The excise rates on these items have been raised (by 12% on average) by
a federal law adopted "on the quiet" in July 2003. As excise
is incorporated in the prices of the goods, we are already having to pay
more for wine, vodka, beer, gasoline and cigarettes.
Another tax was increased on January 1: the mineral extraction tax.
The tax has risen slightly for extracted oil - from 340 to 347 roubles
per tonne, which has practically no tangible effect on anything. But the
tax on extracted natural gas has more than trebled, which will most likely
lead to price rises across the board shortly: Suppliers usually manage
to persuade government regulators to make decisions to shift producers’
growing expenses to consumers.
Finally, huge increases are being slapped on taxes on the gaming business.
The tax on every gaming table will be doubled, and the tax on every slot
machine will rise 2.5 times. On the face of it, this is being done for
good reasons: to boost the state budget by squeezing more tax payments
out of an exceedingly lucrative business. However, the higher taxes could
be counterproductive. Past records have shown that an augmentation of
"gambling" taxes in most cases drove the business into the black
"Formerly, casino owners showed the taxman two gaming tables out
of every three; now they will let him see only one out of every three.
They will of course reward his inability to see the other two."