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- The responsibility to inform tax authorities about all operations relating to VAT accounts of clients (indicating product codes, invoice numbers and dates) may result in significant costs borne by banking organizations, which may pass these costs on their clients. Moreover, vesting tax authorities with the right to prohibit banks carry out operations relating to VAT accounts (as well as apply to the Central Bank for the recall of the banking license in the case of repeated infringements of the procedure governing the submission of such data) provides tax authorities with unjustifiably broad powers concerning regulation of banking activities.

- Prohibiting banks to conduct operations relating to newly opened VAT accounts before receiving from the tax authority an acknowledgement that it received the notification of the opening of a VAT account by the respective person is an additional limitation on the actual start of entrepreneurial activities and will result in more barriers to market entry, especially for small businesses. The actual prohibition to accept for deduction from the tax base VAT amounts paid by the taxpayer in the course of purchase of goods (works, services) for cash.

As it has been noted above, at present there are no substantiated estimates of the majority of taxpayers costs relating to the reform of the legislation pertaining to the value added tax. At the same time, we have evaluated the withdrawal of enterprises working capital resulting from VAT collection via special accounts.

The estimated withdrawal of working capital may be caused by two factors:

- at present, while there is no special VAT accounts system in place, the taxpayer may dispose of the VAT amounts received in the composition of payments for realized goods (works, services) at the taxpayers discretion;

- there arises the necessity to credit the VAT account at the moment the system of VAT accounts starts to operate, for instance, in the case of large purchases, not simultaneous purchases and sales made by the taxpayer, at the beginning of functioning of any enterprise (what is related to purchase of fixed assets, materials, services, etc.)8.

As concerns newly established enterprises, they are especially vulnerable to such losses, since even before any sales the taxpayer would have to purchase raw materials, fixed assets, etc. at the same time transferring 15 per cent of these amounts to the VAT account, while the only possibility to return these amounts to the current account is via the It should be noted that while the first factor behind the withdrawal of working capital is of temporary nature and is related to the impossibility to use the amounts in the special account for purposes not relating to VAT payments, the second factor results from the necessity to withdraw the amounts not related to VAT received in the composition of payments for realized goods (works, services) and enter them to the VAT account.

Taking into account the fact that the tax period for the value added tax makes 1 month, while the amount of the tax should be transferred to the budget before the 20th of the month following the tax period, and assuming that taxable purchases and sales are made evenly over the tax period, as well as the taxpayers wish to fulfill the obligations to the budget as late as possible before the deadline, it may be concluded that the average time of withdrawal of working capital will make 35 days9 in the case the system of VAT accounts is introduced.

According to the data presented by the RF Revenue Ministry (Form 1-NDS), in January through July of 2003 the amount of VAT accruals to the budget as per declarations submitted in 2003 made Rub. 593.billion, or Rub. 98.9 billion for a 35 days period. Taking into account the fact that in 2004 the base VAT rate will be reduced to 18 per cent, the average tax rate will decline from 18.9 per cent to 17.1 per cent (calculated basing on the data on VAT accruals in January through July of 2003 presented in the reporting form 5-nbn). Correspondingly, the amount of withdrawn funds will make Rub. 89.5 billion in prices of 2003, or 0.68 per cent of GDP (proceeding from the estimated GDP at Rub. 13250 billion in 2003).

As it has been noted above, when the system of special VAT accounts is in place, taxpayers working capitals may be withdrawn for the crediting of special accounts because of uneven distribution of the time and amounts of purchases and sales (for instance, in the case VAT from the special account is transferred to the budget, it may happen that the balance is insufficient to transfer VAT due to suppliers; in the situation where a company makes purchases in the beginning of the month and sales evenly over the month it will be necessary to credit the special account from the current account). In the case no amounts are entered to the special VAT account, the necessity to make purchases results in the necessity to credit the special account, at the same time, the proposed scheme does not presuppose the possibility to return funds from the special account to the current account. It is rather difficult to estimate losses, however, it may be assumed that this amount will make about a half of monthly VAT payments, or 0.3 per cent of GDP.

8. Major conclusions for Russia Summarizing the considerations discussed above, the following conclusions may be drawn as concerns the possible impact of the use of special VAT accounts in Russia.

(a) It can not be denied that the introduction of mandatory use of special VAT accounts will result in an increase in revenues of the federal budget, however, first, the scale of this increase can not be estimated, and, second, public costs (i.e. costs borne both by taxpayers and the state, decrease in the revenues of other budgets in the budget system, etc.) relating to this reform may exceed the benefits brought about by the growth in federal revenues. In particular, preliminary estimates of the freezing of enterprises working capital in the result of the introduction of special VAT accounts carried out by IET demonstrate that the amount of withdrawn funds may make over Rub. 100 billion.

(b) At present, there are neither substantiated estimates, nor methods and data permitting to evaluate in quantitative terms the scale of VAT evasion, effectiveness of the measures proposed to prevent such evasion, benefits and costs borne by the public as the result of the introduction of special VAT accounts.

(c) The proposed measure is a technical one and is aimed to prevent a concrete method of tax evasion, the use of which is caused by a number of flaws in the system of legislative regulation and enforcement on the whole, rather than in the tax system. In this connection, it is not apparent the feasibility of the attempts to cope with systemic flaws via extremely cost intensive technical measure.

(d) Among all states collecting VAT, only Bulgaria introduced special accounts as a measure ensuring VAT collection. At the same time, taking into account the specifics of the Bulgarian tax system and the Bulgarian economy on the whole, it can not be maintained that the Bulgarian experience will be useful for Russia. A mechanical recalculation of the budget effects observed in Bulgaria in the result of the introduction procedure of VAT refund from the budget in the case of excess of tax deductions over the size of the tax base bearing all costs associated with this procedure.

Proceeding from the assumption that taxable purchases and sales are made evenly, the term of withdrawal of working capital over the tax period will make 15 days. After the completion of the tax period and before the moment of VAT payment to the budget this term will increase by 20 days.

of special accounts basing on the Russian data demonstrate that depending on the period the increase in VAT generated revenues may make from 0.2 per cent of GDP to 1 per cent of GDP (however, these evaluations are a priori incorrect).

(e) The assumption that prevention of tax evasion via special VAT account will result in elimination of distortions in the economy and removal of competitive advantages of unscrupulous taxpayers is not a proven fact. The proposed reform, both as concerns the introduction of VAT accounts and recommended compensatory measures will result in an increase in costs borne by small and medium sized businesses, as well as newly established enterprises.

(f) Taking into account the considerations discussed above, as well as the results of a possible additional analysis of the problem, it is necessary to work out a package of measures of tax administration preventing VAT evasion efficiently and at the minimal public cost.

I. Trounin Monetary Policy In November, inflation observed on the consumer market remained at the October level and made 1.0 per cent (see Figure 1). It should be noted that in November of the last year the growth in prices significantly accelerated making 1.6 per cent as compared with 1.1 per cent registered in October. The moderate rates of inflation observed on the consumer market was primarily caused by the stability of administratively regulated tariffs on paid services. The respective index made 100.0 per cent in November (100.6 per cent in October). The latter development relates to the absolute reduction of tariffs on a number of products (services) of natural monopolies: the average tariffs on electrical power for households decreased by 2 per cent, fares charged by the main railroad transport fell by 4.4 to 9.0 per cent. At the same time, base inflation10 (1.4 per cent in October, 1.1 per cent in November) remained at a significantly higher level than that registered in the beginning and middle of 2003. Therefore, it outpaced the general consumer price index, what is untypical for the 4th quarter, when the seasonal dynamics of prices of vegetables and fruits usually accelerates.

Figure 1.

The Growth Rate of the CPI in 2002 - 2003 (% per month).

3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% Source: RF Goskomstat The Base Consumer Price Index (BCPI) is an indicator reflecting the inflation rate on the consumer market. It leaves out of account the seasonal (prices of fruits and vegetables) and administrative (tariffs on regulated types of services etc.) factors, calculated by the State Committee for Statistics of the RF.

Jul Jul Jan Jun Jan Jun Feb Sep Feb Sep Oct Oct Apr Aug Dec Apr Aug Mar Mar Nov Nov May May According to the authors evaluations, in December the growth in consumer prices will not exceed 1.3 per cent. Therefore, the preliminary forecast of annual inflation rates makes from 12.0 to 12.2 per cent, what practically corresponds with the highest limit of inflation set by the governmental forecast for 2003.

Gold and foreign exchange reserves of the Bank of Russia increased by US $ 3.2 billion (5.0 per cent) in November, reaching US $ 68.2 billion as on December 1 (see Fig. 2). Over 11 months of this year, the growth in reserves made US $ 20.4 billion, or 42.6 per cent. As on January 1, the reserves made US $ 47.billion. The percentage of foreign exchange reserves in the overall foreign reserves increased by US $ 3.billion, or by 5.3 per cent, reaching US $ 64.4 billion in November. Over the 10 months of this year, the growth in reserves made US $ 17.1 billion, or 35.85 per cent. On the whole, foreign exchange reserves increased by US $ 20.4 billion, or by 46.2 per cent over 11 months of this year. The amount of gold in the composition of the reserves remained practically at the same level over the whole year (US $ 3.739 billion as on January 1 and US $ 3.744 billion as on November 1).

As on December 5, the amount of gold and foreign exchange reserves of the Bank of Russia made US $ 70.6 billion. Therefore, it increased by US $ 2.5 billion over the week. Such a significant growth in gold and foreign exchange reserves in 5 working days has been registered for the first time since May 23 of this year, i.e. in the last six months. In the next week, the reserves increased further by US $ 1.2 billion reaching the level of US $ 71.8 billion. The increase in the gold and foreign exchange reserves is registered for the fifth week running (+ US $ 7.1 billion).

These rates of increase in the gold and foreign exchange reserves over 20 working days have been record high since the Central Bank started to publish information about its gold and foreign exchange reserves. As a result, the present level of the reserves is by US $ 5.8 billion above the target for the growth in gold and foreign exchange reserves in 2003 recently indicated by O. Vyugin, the First Deputy Chairman of the Bank of Russia. The factor behind this development was the massive purchase of US dollars carried out by the national bank on the domestic market.

Figure 2.

Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2002 - 2003.

1290 1270 1250 1230 1210 1190 1170 1150 1130 1110 1090 1070 1050 1030 1010 990 970 950 930 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) In November of 2003, the monetary base of the Russian Federation in the broad definition11 increased by 2.6 per cent from RUR 1500 billion to RUR 1540 billion as on December 1, 2003. in January through November, the broadly defined monetary base increased by 24.9 per cent (from RUR 1233 billion registered The Monetary Base in broad definition includes cash in circulation, the funds in mandatory reserves, and funds in commercial banks' correspondent accounts with the Bank of Russia.

billion rubles billion dollars 2-8.06.2-8.12.7-13.04.5-11.05.8-14.09.6-12.10.4-10.11.10-16.03.24-30.03.21-27.04.19-25.05.16-22.06.14-20.07.11-17.08.25-31.08.22-28.09.20-26.10.18-24.11.30.06-6.07.28.07-3.08.in the beginning of the year). In November, the amount of cash in circulation (as adjusted for cash balances of crediting organizations) grew from RUR 1034 billion to RUR 1062 billion, or by 2.7 per cent (by 30.5 per cent since the beginning of the year). In November, the amount of deposits in the Bank of Russia increased by 16.4 per cent up to RUR 6.4 billion. The amount of the CBR liabilities concerning repurchase of securities did not change remaining at RUR 55.5 billion.

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