Improving the mechanism of tax administration of VAT benefits in the context of digitalization

Balakin Maksim Sergeevich Postgraduate student, Department of Taxes and Tax Administration, Financial University under the Government of the Russian Federation 15 Verkhnyaya Maslovka str., Moscow, 127083, Russia msbalakin@fa.ru

Introduction

Value added tax (VAT) is one of the main sources of income for the consolidated budget of the Russian Federation. Thus, in 2023, internal VAT amounted to 12% of all revenues of the Russian budget system, and taking into account VAT on imported goods – 20% ^[24].

VAT, as a relatively neutral tax, hinders economic growth less than, for example, income taxes on individuals and legal entities, which are considered more distorting ^[2]. Therefore, an increase in the share of this tax in the structure of the tax system can, in principle, contribute to positive economic dynamics. Although there is no convincing empirical evidence for such a statement. Much depends on the circumstances of the place and time, including how tax revenues are spent ^{[1, p. 92]}.

However, if the basic VAT rate increases, this may have negative consequences for economic growth. There are several reasons for this.

First, an increase in the tax rate may lead to a decrease in the purchasing power of consumers, especially the less well-off, as goods burdened with an increased tax become more expensive. As a result, the population may reduce their consumer spending, which will negatively affect demand, reducing overall economic activity in the country.

Secondly, an increase in VAT may increase inflationary pressures, especially if enterprises have the opportunity to shift their higher costs to consumers in the form of price increases. Inflation can further reduce consumer purchasing power and, if it exceeds a certain threshold, significantly increase uncertainty in the economy, which negatively affects investment and economic growth.

Thirdly, an increase in VAT rates, depending on the specifics of tax transfer in a given situation, may also partially affect businesses, reducing profit margins and potentially hindering investments in new projects or expansion of production, on which economic growth depends. In addition, business costs may increase due to the increased costs of complying with tax legislation (usually a large number of offenses are associated with VAT, which are more burdensome for taxpayers at a high tax rate).

One can also cite arguments related to redistributive effects, international trade, etc. Therefore, it is better not to raise the basic VAT rate, increasing the risks to economic growth, but to ensure an increase in budget revenues through better administration of this tax, while directing additional funds to compensate for shortfalls in more distorting taxes, such as insurance premiums for compulsory social insurance.

In this regard, the digitalization of tax administration, which can reduce tax gaps, is of particular importance. The use of digital technologies, such as data automation and analytics, makes it possible to quickly identify and eliminate discrepancies in tax chains, which prevents tax evasion and increases tax revenues to the budget. As a result of the digitalization of tax administration, by the end of 2020, the VAT tax gap was 0.43%, while in previous years it averaged 8% ^{[12, p. 107]}.

Given the important role of digital technologies in improving tax administration mechanisms, much attention is paid to theoretical and applied issues of their use in taxation.

A. Advocatova ^[5] and S. Kopytova ^[17] focus on specific systems and processes related to the functioning of AIS "Tax-3". E. Kirova, A. Kozhebatkina ^[16] and I. Ogorodnikova ^[20] focus on the patterns of general evolution and new technologies of tax administration. C. Kubatko and B. Vilgonenko ^[18] pays more attention to current problems and offers specific solutions. And Anisimova ^[6-8], S. Kolchin ^[7-8], V. Brattsev and A. Grishanova ^[9] consider international experience and adaptation of best practices to the realities of the Russian economy. D. Grunina ^[13] discusses the advantages and disadvantages of using information technology in tax administration. I. Gashenko ^[11], E. Golik ^[12], O. Karpova and I. Maiburov ^[14], N. Steba ^[21] focus on the problems of VAT administration and methods of increasing efficiency through digitalization and automation of processes. A. Bugrushev ^[10] analyzes modern tools such as AIS systems "Tax-3" and the VAT ASK, as well as their impact on tax control.

At the same time, despite the wide coverage of topics and research areas in this subject area and the successes already achieved in practice, further analysis of the specific problems of digitalization of tax administration of VAT benefits related to the consolidation of taxpayer data is required. To date, the administration of VAT benefits has not yet been fully digitized and is performed mainly manually. This, in turn, negatively affects the efficiency and transparency of tax administration.

In this regard, the purpose of the study is to develop proposals to improve the system of control over the use of VAT tax benefits, taking into account the digitalization of the process of consolidating taxpayer data and aimed at further improving the efficiency and transparency of tax administration.

To achieve this goal, the following tasks have been solved:

- the state of VAT tax administration in the Russian Federation has been analyzed;

- the history of the formation of tax administration in the field of control over the use of VAT tax benefits is investigated;

- the features of the current system of control over the use of VAT tax benefits in the Russian Federation have been identified;

- proposals have been developed to improve the system of control over the use of VAT tax benefits, taking into account the digitalization of the process of consolidating taxpayer data.

The following research methods were used:

- economic and legal analysis – to consider the specifics of legislative and regulatory acts regulating tax administration and preferential VAT taxation;

- historical and legal method – to study the history of the formation and development of the tax administration system in the field of control over the use of VAT tax benefits;

- algorithmization – to describe the current system of control over the use of VAT tax benefits, as well as to create a new, more advanced algorithm for the functioning of the system of control over the use of VAT tax benefits, providing for the digitalization of the process of consolidating data on taxpayers.

The structure of the work is as follows.

At the beginning, the features of VAT tax administration in the Russian Federation are considered. The analysis of the history of the formation of tax administration in the field of control over the use of tax benefits continues. Then, based on the results of the performed analysis, the features of the current system are considered and a new, improved control system for the use of VAT tax benefits is proposed. The work is completed with a discussion of the results and brief conclusions.

Features of VAT tax administration in the Russian Federation

Usually, national tax authorities begin the digitalization process with VAT, since this tax, unlike the same corporate income tax, lends itself well to algorithmization. In this regard, the Russian Federation is an example of how the VAT tax administration system can develop in the context of digitalization: from filing a tax return in electronic form to creating a national data analysis platform that allows the Federal Tax Service of Russia (FTS of Russia) to view "risky" transactions, as well as track them throughout the supply chain to identify systemic fraud and tax evasion ^[4].

As a result, at the OECD Tax Administration Forum, it was noted that Russia, represented by the Federal Tax Service of Russia, is among the leading countries in terms of the use of digital technologies, and VAT is the leader of Russian taxes in terms of the digitalization of its administration ^[22].

In recent years, the approach to VAT tax administration in the Russian Federation has undergone a number of significant changes: the number of documents provided by taxpayers has decreased; the principle of interaction between tax authorities and other departments has changed; automated software systems have been introduced; a risk-oriented approach has been developed and applied ^{[1; 2; 15; 18]}.

At the same time, it is still important to solve the problems of further digitalization of the elements of the current tax administration system, especially in the field of control over the use of VAT tax benefits.

The history of the formation of tax administration in the field of control over the use of VAT tax benefits in the Russian Federation

Prior to the introduction of VAT-2 in 2015, the administration of VAT benefits was based on a variety of paper-based manual and disparate processes with a focus on how the tax system should work from a tax administration perspective.

The first significant problem inherent in this type of tax administration was the lack of a clear list of documents confirming the company's right to VAT benefits. Such uncertainty led to misunderstandings between taxpayers and tax authorities, as well as to an increased risk of unlawful requirements regarding the provision of documents by tax authorities.

The second problem was the lack of clear rules prohibiting the submission of repeated documents or documents that can be discovered by tax inspectors on their own. Uncertainty in this matter created increased risks for taxpayers if they provided documents that were duplicated, or vice versa, if they ignored the requirements of inspectors, which could lead to fines and sanctions.

The third is the lack of standard contracts and approved forms of documents, especially in cases where they are necessary to confirm benefits or special tax conditions. Insufficient standardization of documentation complicated the tax administration process and created additional difficulties for both taxpayers and tax authorities.

The introduction of VAT-2 in 2015 was a turning point in the development of the VAT tax administration system. The main purpose of this software package was to identify and eliminate VAT tax gaps, as well as to detect cases of illegal reduction of the tax base and the amount of accrued tax through the use of "one-day enterprises". In addition, the program began to include a risk management system – SUR ASK VAT-2, which began to automatically assess the level of tax risk of taxpayers who submitted VAT declarations according to several dozen criteria ^[19].

As a result of the transition to a risk-based approach based on the VAT-2 RMS, the approach to identifying and analyzing tax risks associated with the application of tax benefits has been changed. So, in 2017, a Letter from the Federal Tax Service of Russia No. ED-4-15/1281@ was published "On sending clarifications regarding a risk-based approach to conducting desk tax audits of tax returns, which reflect transactions that are not subject to VAT taxation in accordance with paragraphs 2 and 3 of Article 149 of the Tax Code of the Russian Federation", which established standard contracts and determined the percentage rates for taxpayers to submit documents depending on their risk profile, which greatly simplified the work of tax authorities in the field of control over the use of VAT tax benefits.

In 2020, it was decided to abolish standard documents and introduce electronic registers into the process of tax administration of VAT benefits. Now organizations submit electronic registers, and tax inspectors request documents according to certain codes specified in articles of the Tax Code of the Russian Federation:

- for counterparties – Article 93.1 "Requesting documents (information) about the taxpayer, the payer of fees, the payer of insurance premiums and the tax agent or information about specific transactions";

- for state bodies – Article 85 "Obligations of bodies, institutions, organizations and officials to report to the tax authorities information related to accounting of organizations and individuals";

- for banks – Article 86 "Obligations of banks related to the implementation of tax control".

Features of the current system of control over the use of VAT tax benefits in the Russian Federation

Figure 1 schematically shows the current system of control over the use of VAT tax benefits.

As can be seen from the diagram, despite the fact that the main communication between the taxpayer and the tax service takes place through telecommunication channels, the current system still maintains a manual mode - when the tax inspector requests, and the taxpayer provides documents confirming the right to receive a VAT tax benefit.

Since the current system of control over the use of VAT tax benefits requires manual request and submission of documents, this increases the time and resources needed to verify the taxpayer's right to tax benefits.

Also, the manual mode of communication complicates the stage of checking tax benefits and may lead to an increased risk of unlawful requirements regarding the provision of documents by the tax authorities.

Finally, manual document processing increases the risk of errors and delays in the process of tax administration of VAT benefits, which can also negatively affect the efficiency of the entire system.

Source: compiled by the author

Fig. 1. The current system of control over the use of VAT tax benefits

An improved system for monitoring the use of VAT tax benefits, taking into account the digitalization of the process of consolidating taxpayer data

One of the promising directions for further digitalization of VAT tax administration, which can solve the described problems, is a system for monitoring the use of VAT tax benefits, based on the consolidation of taxpayer data in order to create a single point of access to information.

This new approach involves the creation of a platform that will accumulate all the necessary information about taxpayers, including information accumulated by various subordinate organizations that have a register of legal entities that operate in the relevant field.

Unlike the current system, which requires the work of a tax inspector in manual mode (see the right part of Fig. 1), now the consolidated information will be automatically "pulled up" in the VAT-2 Tax Code and used to confirm the eligibility of taxpayers to apply the VAT tax benefit without manually requesting taxpayers to provide them with the necessary supporting documentation (Fig. 2).

The manual mode of providing documents can be applied only if there is a disparity between the information "pulled up" by the software and the data displayed in the reporting on benefits (in electronic registers). Only at this point will the tax inspector be involved in the work to clarify the causes of such a "gap", and its functionality will be aimed at eliminating alleged violations.

It should be noted that the proposed system of control over the use of VAT tax benefits based on the consolidation of data from various subordinate organizations can be an important step towards the formation of tax administration 2.0, which involves, among other things, improving interaction both within the tax service and the tax service with other public administration bodies ^{[3, p. 3]}. Without this stage of digitalization, a further transition to even more advanced tax administration 3.0 is impossible.

The advantages of the proposed approach are also that digitalization of data exchange will increase the efficiency and speed of information processing, strengthen control over the legality of tax benefits and reduce the likelihood of fraud and possible abuse in this area.

Source: compiled by the author

Fig. 2. The proposed system of control over the use of VAT tax benefits, taking into account the digitalization of the process of consolidation of taxpayer data

However, the implementation of this system is associated with a number of problems. For its full implementation, compliance with a number of conditions is required, including:

(1) unification of the list of documents confirming the right of enterprises to VAT benefits, with a clear distinction between which documents the taxpayer himself must submit, and which documents can be "pulled up" from subordinate organizations automatically^[1];

(2) standardization of standard forms of documents submitted by taxpayers to simplify the process of their digitalization and consolidation;

(3) amendments to the VAT declaration regarding the division of activities that fall and do not fall under preferential VAT taxation;

(4) regulation of the rules governing the rights of taxpayers to refuse to apply the VAT tax benefit.

Condition (1) is put forward on the basis of an analysis of existing problems in document management and interaction between tax authorities and taxpayers. Its implementation is necessary to eliminate ambiguity and improve the interaction between them. This requires a clear definition of the list of documents provided by the taxpayer, which can be automatically transferred from subordinate organizations, which will help reduce the risk of errors and the overall administrative burden.

The statement of condition (2) is based on the positive experience of standardizing documents in the field of tax administration. It is aimed at reducing the cost of time, labor and financial resources for tax administration, as well as reducing the likelihood of possible errors.

Condition (3) is formulated based on the analysis of current difficulties and errors in the practice of tax administration associated with insufficient detail and clarity of tax returns. The separation of activities that fall and do not fall under preferential VAT taxation will allow the developed system to provide the necessary data to digitalize the process of consolidating taxpayer data, as well as simplify control over the eligibility for the application of VAT benefits.

Finally, condition (4) is related to the need to ensure freedom of choice for taxpayers, which is the basis of any fair tax system. This condition prevents the enforcement of benefits that may be unprofitable for some business entities.

Thus, the developed approach develops ideas related to the application of taxation principles in the digital economy (see, for example, ^[11]), namely the requirement to minimize the costs of access to the tax base.

At the same time, unlike works that put forward general directions of digitalization of tax administration, in particular, focus on the need to use it to improve the effectiveness of tax control ^[5], propose new approaches for adapting tax authorities to digital changes ^[9], etc., the completed study contains specific provisions regarding the conditions necessary for further digitalization of the control system for the use of VAT tax benefits.

Conclusion

The paper substantiates an improved system of control over the use of VAT tax benefits, which provides for the digitalization of the process of consolidating taxpayer data, which is based on the general principles of taxation in the digital economy and can make significant improvements in VAT tax administration, bringing it to a new level of efficiency and transparency.

This system provides for the creation of a centralized platform for collecting and analyzing information about taxpayers, as well as automating the processes of confirming the eligibility of tax benefits. This will allow the tax service to reduce the amount of work on manual requests for documents from enterprises, which will reduce the administrative burden for both the tax service and taxpayers.

In addition, a control system based on consolidated data can improve interaction between various government agencies, contributing to further digitalization and optimization of tax processes. This step is an important stage in the formation of tax administration 2.0, which is necessary for the subsequent transition to more advanced forms of administration that ensure increased efficiency, transparency and fairness of the tax system as a whole.

However, for the successful implementation of the proposed system, it is necessary to carry out preparatory work on the unification and standardization of documents confirming the right of enterprises to VAT benefits, making appropriate changes to the VAT declaration, and regulating the rules governing the rights of taxpayers to refuse to apply tax benefits.

The theoretical significance of the study is that it substantiates the conditions necessary for the implementation of the principles of tax administration in the digital economy (for example, VAT). Its practical significance lies in the fact that the developed system of automatic control over the use of VAT tax benefits can be used in the activities of tax authorities as part of the program module of the SUR ASK VAT-2.

An important area of further research in this subject area is the justification of digital mechanisms for automatically determining the effectiveness and efficiency of the application of VAT tax benefits.

The article was prepared based on the results of research carried out at the expense of budgetary funds under the state assignment of the Financial University.