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Wednesday, October 23, 2019

VTB: Proposed sales tax increase may hurt business confidence

Russian government officials met with President Vladimir Putin last week to discuss new measures aimed at boosting indirect taxation.

Putin has voiced preference for imposing a regional sales tax to an increase in VAT as a means of increasing budget revenues, according to a VTB Capital analyst who said a tax increase was unlikely to be implemented before 2016.

"The general government's budget surplus over the first five months of this year was almost twice as big as last year," the analyst said. "Moreover, next year looks particularly undesirable for tax increases in terms of timing, given the cyclical picture and stagflationary environment."

In addition, VTB said the imposition of a sales tax could hurt business confidence.

"And given the low fiscal multiplier, its overall impact on GDP growth would be fairly negative," the analyst said. "Moreover, the pass-through into inflation (+1.0-2.0pp to the headline CPI depending on the scope of regions and CPI items affected) would significantly complicate the shift to inflation targeting and prevent inflation expectations from being anchored, while potentially increasing risk that the government succeeds in diluting the CBR's independence."

News of Wednesday's meeting, however, has added risk to VTB's growth, inflation and rates outlook, the analyst said.