How will the reduction in value added tax affect the economy?
Tashkent, Uzbekistan (UzDaily.com) -- Experts of Institute for Forecasting and Macroeconomic Research (IPMI) have analyzed how reducing the tax burden and value added tax (VAT) to 3 percentage points will affect the economy.
VAT is the main source of state budget revenues. In 2021, VAT receipts reached 38.4 trillion soums and amounted to 23.4% of the total amount of receipts. About 44% of VAT revenues come from industries, 18% from construction companies, and 13% from wholesalers and retailers.
The VAT tax burden is unevenly distributed across industries and sectors of the economy. For example, in education and health care, the tax burden was 8.5%, in agriculture - 5%, in construction and communication services - 79%, in retail and wholesale trade - 59%, in industry - 43%. This violates the principle of creating equal conditions for various industries and sectors of the economy, and limits the scope of the principles of fair competition.
The industry average relative rate for the economy as a whole amounted to 24%. This means that at a nominal rate of 15%, the real VAT rate was about 3.6% (15% * 0.24 = 3.6%).
The highest tax burden is characteristic of industries for which there is a steady demand regardless of price fluctuations and other production conditions (construction, trade, some promising types of services). They account for only 15% of production throughout the economy (in terms of GDP and output), 14% of employees. A distinctive feature of this group is the least degree of dependence on the external environment.
A moderately high level of tax burden is characteristic of the extractive and manufacturing industries. This group accounts for ¼ of the GDP of the economy as a whole. These are the industries that are most connected to the global economy, because they account for over 83% of intermediate imports and over 2/3 of all exports. The high tax pressure constrains the growth of exports of industrial production, because. the high actual VAT rate for these industries leads to higher prices and lower competitiveness of their products.
The following aspects were identified during the study:
Since VAT is included in the market price of goods/services, a reduction in the nominal rate from 15% to 12% lowers the overall price level in the real sector of the economy.
According to the calculations performed using the cost-output price model, such a decrease is estimated at 0.81%.
The largest contribution to the decline in prices falls on the manufacturing industry (39%), construction (14%) and wholesale and retail trade (10%), i.e. these three sectors account for almost 2/3 of the total price decline (out of 0.8%).
From this point of view, measures aimed at reducing the gap between actual and nominal rates, as well as reducing the average rate of actual rates (24%), which is 22.8% according to the standard deviation, can be relatively promising. This provides an increase in tax revenue even with a reduction in the standard VAT rate.
At the same time, the experience of China seems to be useful. The standard VAT rate in China is 13%. Reduced VAT rates at the level of 9% introduced for retail, entertainment, hospitality, catering, construction, transport, postal and logistics services and 6% - for financial sector and insurance, information technology and consulting.
But if we consider the issue of introducing differentiated VAT rates, then this should be implemented while eliminating the majority of tax benefits that have not justified themselves. At the same time, the VAT rate should be the lower, the higher the share of finished products in the total output, which will encourage enterprises to introduce new technologies and innovations, increasing the share of value added and not incurring significant costs in the form of a rapidly growing tax burden.