Nikita Deynega analysed for Mashnews the applicability of the scheme of post facto VAT payment by state defence contractors
The State Duma Committee on Budget and Taxes has recognised that it is inexpedient to change the mechanism for the payment of VAT by enterprises engaged in the fulfilment of state defence orders. At present, it is paid at the moment when products are shipped from the contractor to the customer. At the same time, postpayment is common in the state defence order sector, when the contractor receives the money after the products have been manufactured. Therefore, he is forced to pay VAT from his own turnover funds or take a loan at high bank rates.
Anatoly Rusin, CEO of the military-industrial holding company Kingisepp Machine-Building Plant, in his appeal to the Russian State Duma, proposed that state defence order companies should change the VAT payment scheme and transfer money to the tax service after all work has been paid for by the customer. This practice existed in Russia until 2006. However, the Сommittee believed that this would “collapse the entire VAT system,” which is based on deductions received by participants in the production chain, from the production of raw materials to the delivery of finished products. At each stage, VAT is included in the cost. That is, companies calculating the amount of tax can get a deduction for the amount they have already paid when purchasing raw materials or components. And if someone in the chain pays VAT under a different scheme, in theory it could affect all other counterparties.
“Such an issue may arise only in a situation where a different moment of determining the tax base would be established for a particular type of taxpayer (for example, receipt of payment rather than shipment of goods), but the general procedure for deducting “input” VAT on such transactions would be retained. In other words, the purchaser could deduct input VAT before the output VAT payable is calculated. Of course, this would not be in line with the basic principles, including the ‘mirroring’ of VAT and the need to have an economic source for the deduction of ‘input’ VAT,” Nikita Deynega, Partner and Head of Tax and Administrative Law Practice at Maxima Legal, explained to Mashnews.
The expert clarified that this is not a desperate situation. “An obvious solution to this problem could be the establishment of not only a special VAT payment procedure (“on payment”), but also a mirror procedure for applying deductions (also “on payment”),” he said.
It should be noted that in the The State Duma Committee on Budget and Taxes among the reasons why in 2006 it was decided to pay VAT at the time of shipment of goods, called the fight against VAT evasion by hiding the proceeds.
“If we consider the possibility of a full return to the pre-2006 model for all categories of taxpayers, it could indeed have a negative effect on tax collection (not only due to purposeful unfair actions of taxpayers, but also as a result of their inability to fulfil tax obligations post facto for objective economic reasons). However, in the proposed variant, when such a model would be applicable only to state defence contracting companies, it seems that the risks of fraud are minimal due to the increased selection of suppliers and contractors and the existing mechanisms of control over the spending of budget funds,” stressed the Partner at Maxima Legal.
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