Starting 2019, agricultural taxpayers will become VAT payers as well, required amendments to the chapters 21 and 26.1 of the RF Tax Code have been drafted and are about to come into effect.
In accordance with the Federal Law of 27th November 2017 No 335-FZ «On the introduction of amendments in part one and part two of the Tax Code of The Russian Federation and into certain legislative acts of the Russian Federation», agricultural producers, who pay single agricultural tax, from 1 January 2019 will also pay VAT, as in case of the general tax regime. Current VAT exemption will still be available, but will be of an optional nature: single agricultural taxpayers, whose income won’t exceed the set level, will be able to decide whether to pay VAT or not.
Such drastic reform of the single agricultural tax regime is the solution to the long discussed problem of the worsening competition between entrepreneurs. Entrepreneurs, while on a special tax regime, cannot switch to the full system of VAT calculation and deduction and as a result loose customers. As it is noted in the letter sent by the RF Finance Ministry on the 24th of January 2018 No 03-07-14/3564, such legislative amendments are «targeted at the gradual merging of the single agricultural taxpayers into a chain of VAT payers in order to secure their taxpayers unrestricted participation in business relations with the payers of the given tax, which earlier faced problems … related to VAT deduction».
It is important to note that in the current draft Law No 335-FZ the choice to pay or to be exempt from VAT will be available with income not more than Rb 100 million for 2018 earned from the activity which is covered by the single agricultural tax, that is only for microbusiness entrepreneurs. Moreover, this threshold will be decreasing annually, until it hits Rb 60 million in 2023. Besides, the procedure for tax exemption is quite strict: a single violation of the threshold income requirement in the course of a tax period will be sufficient enough to forbid the taxpayer to use tax exemption again despite the amount of his future incomes. Disposal of excisable goods will have similar consequences for the taxpayer.
Time will tell what kind of consequences these amendments will bring. To this day, Russian Finance Ministry forecasts positive effects in the form of increase in demand for agricultural products, increase in sales and formation of preconditions for technical and technological modernization of machinery and equipment, due to general nature of VAT deduction, including in case of fixed investments necessary for the production of agricultural products. Harmonization of VAT and single agricultural tax payment will be an important advantage.
On the other hand, for the sake of objectivity, it is important to note that earlier, the Russian Finance Ministry expressed concerns about giving the right to pay VAT to single agricultural taxpayers according to the standard procedure.
The risks are as follows (potential consequences):
Decrease of the regional and local budgets’ revenue base, because the number of individuals paying taxes according to the standard procedure will fall due to the single agricultural tax popularity;
Increase of the tax burden on tax payers of the single agricultural tax because VAT deduction disqualifies taxpayers from recognizing the amounts of this tax in their expenditures;
Price growth on goods, works and services as a result of growing tax burden;
Increase of the administrative burden on business: VAT payment requires introduction of the necessary flow of documents, including books with received and presented VAT invoices, purchase ledger and sales ledger. Moreover, accounting process will become more complicated and spending on tax compliances will grow.
Strengthening of tax surveillance over the single agricultural taxpayers.
Therefore, cumulative effect of the new amendments will not be simple. In its turn, restriction of the revenues will objectively «cut off» half of taxpayers from the tax exemption. Taxpayers who are happy with the current laws and do not want any changes will find themselves in the above-mentioned group. In the first place, they are agricultural producers whose expenditures mainly consist of wages and rent. They won’t gain anything from VAT deduction, but will have to asses that tax anyway. Therefore, the problem of practicing the single agricultural tax won’t be completely resolved.
In the same time, implementation of the single agricultural tax in line with the new rules will be a kind of testing of VAT payment in the framework of special tax regime, which stayed unchanged from the moment it appeared in the Tax Code of Russian Federation (2002) and will provide a valuable practical experience. On its basis it will be possible to estimate expediency of mentioned amendments including with respect to the prospects of a simplified tax system when there is a similar issue of impossibility to refuse VAT exemption, when the right to tax deduction can be implemented on condition of transition to the general tax regime.
Vladimir Gromov - candidate of sciences (economics), senior researcher, Tax Policy Studies Department, IAES, RANEPA