Digest Finance

VAT Reform and Taxation of the Construction Sector

Vol. 24, Iss. 1, MARCH 2019

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Received: 26 November 2018

Received in revised form: 12 December 2018

Accepted: 26 December 2018

Available online: 29 March 2019


JEL Classification: H21, H25, H26, H30

Pages: 64-83


Davletshin T.G. OOO Burovye i Neftepromyslovye Nasosy (Oil-rig and oilfield pumps), Kazan, Republic of Tatarstan, Russian Federation

ORCID id: not available

Subject The article discusses the taxation specifics of entities in the construction sector, tax burden and financial results under various taxation treatment and costs, impact of tax law imperfections on financial results teetering on the edge of general and special tax treatment.
Objectives The research aims to set an effective taxation system stimulating the economic growth, raising the revenue of the budgetary system, involve business entities operating in the construction sector into the scope of the applicable law.
Methods The research applies general scientific approaches and methods.
Results I examined the imperfection of VAT laws as the main cause of informal financial schemes used in the construction sector. Considering the estimated tax burden of construction entities and respective costs under different tax treatment, I point out that the general tax treatment implies the high tax burden. As small businesses opt for the simplified tax treatment, their production costs increase since VAT paid for resource acquisition is not refunded but charged to cost. Furthermore, being sold to entities subject to the general tax treatment, goods (work, services) of entities subject to the simplified tax treatment can be delivered at the price reduced by the VAT rate. This has a detrimental effect on financial results and engenders tax evading schemes.
Conclusions and Relevance In the construction sector, entities have a high level of tax burden, which strongly depends on a tax treatment. This contravenes principles of equality, neutrality, fairness and proportionality of taxation. There should be new fiscal treatment mechanisms to fit the construction specifics.

Keywords: general tax regime, simplified taxation system, tax harmonization, value added tax


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