VAT mitigation for businesses on the simplified taxation system
Regulations in a new proposed tax bill relating to the enforcement of VAT for entrepreneurs using simplified taxation systems (“STS”) will be softened.
Businesses which purchase goods or services through “simplified taxation systems” to which VAT is charged at new special rates will be allowed to claim a deduction for the amount of “input” tax.
These updates were developed by the Ministry of Finance for the second stage of reading and confirmed by a source familiar with the document. The bill drafted by the Ministry of Finance was submitted to the State Duma in early June and passed in the first reading on 20 June. It is expected that the final adoption of the bill will take place before the end of the current parliamentary session, and the changes will come into force on 1 January 2025. On 3 July, the Ministry of Finance reported the amendments to the Duma, with the second reading scheduled for 9 July.
Proposals for the second reading include allowing buyers to deduct VAT at reduced rates. Currently, VAT-paying businesses can deduct “input” VAT embedded in the cost of goods and services they purchase from the amount of “output” VAT included in the cost of goods and services sold. The first version of the draft law provided for the possibility of such deductions only for those who pay VAT at the basic rate of 20% and their customers. Such deductions were not available at the reduced rates of 5% or 7%.
The draft law stipulates that businesses on the simplified taxation system will become VAT payers, but the obligation to pay the tax will arise only for companies and sole proprietors with an annual income of more than 60 million rubles. According to the Ministry of Finance, only about 3% of entrepreneurs on simplified taxation have such income. Companies on simplified taxation will be able to choose how to pay VAT: at the general rate of 20% (10% and 0% in some cases) or at a reduced rate (5% for income up to 250 million rubles and 7% for income from 250 million to 450 million rubles).
For the second reading, the State Duma Committee on Budget and Taxes recommended allowing buyers of goods and services to deduct VAT charged by sellers applying reduced rates of 5% or 7%. According to the amendments introduced, it is proposed that the clause prohibiting purchasers from deducting “input” VAT when acquiring goods and services from sellers using reduced rates should be deleted from the draft law.
Thus, purchasers of goods and services from entrepreneurs on the simplified taxation system who apply any VAT rate (5%, 7%, 10%, 20%) will be able to deduct the relevant amount of VAT. For example, if an entrepreneur on the simplified taxation system sells goods for 1,050 rubles with VAT at 5%, the purchaser will be able to deduct 50 rubles from his tax.
The current version of the draft law establishes that organizations and individual entrepreneurs on the simplified taxation system have the right to be exempted from the duties of a VAT payer if their income is less than 60 million rubles per year. According to the amendments, they are exempt from VAT duties if certain conditions are met, and the need to submit a notification to confirm the exemption is cancelled. The Federal Tax Service points out that 97% of businesses on the simplified taxation system have income up to 60 million rubles, which makes paperwork unnecessary for most taxpayers and tax authorities. All those whose income is below the established limit will automatically be considered exempt from VAT.
The amendments specify that newly established organizations and newly registered individual entrepreneurs are exempt from paying VAT until their income reaches 60 million rubles.
According to the new rules, if an entrepreneur exceeds the threshold of 60 million rubles within a year, he starts calculating VAT from the 1st day of the month following the month of exceeding the threshold.
In addition, if an individual entrepreneur simultaneously applies the simplified and patent taxation systems, the Ministry of Finance proposes to take into account the total income under both tax regimes in determining the amount of income. This issue is now being resolved by the Duma Committee on Budgets and Taxes.
