Taxes and Retail Markets in the Formal and Informal Economy

Retail trade has transformed over the past six years under the influence of objective global processes. The global center of gravity in consumer spending began to shift from the US and Europe to the emerging markets. In a world where almost everyone has a mobile phone, the pace of this transition is strongly related to the pace at which the mobile payment systems are adopted [1]. As more activities can now be done using the Internet, the number of different crimes, including those related to payment processing, has also increased. According to global trade statistics, there is not a single country in the world that has not seen a decline in trade turnover over the past six years. Whereas Asia has suffered the least severe reduction in the volume of trade (0.5%), the Middle East (9.7%) has experienced the greatest drop in trade turnover. Thanks to the anti-crisis programs introduced to support various institutions, from crucial enterprises to small and medium-sized businesses, the CIS countries have occupied the middle position in this ranking with a 4.3% decrease in trade turnover [2]. The largest declines were recorded for non-food products. As nearly half of the population fell into the cost of living crisis or experienced unemployment, many consumers adopted a saving behaviour, causing the general demand for non-food products to become significantly deferred [3]. The infrastructure of internal trade (e.g., fairs, online marketplaces, wholesale and retail businesses) has a considerable impact on the supply of goods and services [4].

Trade, in particular domestic trade, acts as a link between production and consumption, ensuring that all needs of the population are satisfied [5]. Antonyan [6] defined the retail market as a secular structure that rests upon rational norms within the socially created trading platform. Its spatial structure is influenced by the social hierarchy of market participants through pricing and consumer actions. Depending on the situation, the market can take the shape of formal and informal activities [7]. Formal and informal markets are not separate entities, but rather operate in personal-political or micro-macro tandem that generates new trade routes, contacts, and consumption patterns [6, 8]. Formal markets are mostly stationary “brick-and-mortar” outlets (e.g., stalls, kiosks, booths, etc.) embedded into the social landscape through registration as a market entity [9]. In the broad sense, markets have become partially institutionalised, but remain flexible, which implies a certain degree of informality. In most cases, informal markets exist within the formal structure of stationary markets in the form of itinerant and spontaneous trading. The study of the CIS retail trade in the frame of a formal and informal economy represents an important and promising field, considering the growth of these markets and the extent to which their operational activities impact the economy of the region. Apparently, the CIS countries, Russia and Kazakhstan in particular, offer vast opportunities for the development of retail trade, given the markets’ scale and the non-stop development of different forms of cooperation between the sellers and consumers. The research context covers rather pressing and urgent issues of today’s retail trade, both in the context of the formal market and the circumstances of the emergence of the informal market conditions. Understanding these factors enables developing important strategies to improve customer interaction, increasing taxation transparency and overall economic capacity, thus adding to the business competitiveness and enhancing the overall retail trade. Therefore, the main goal of the current research is to come up with a more concise definition of fiscal regulations that can be utilised for monitoring and developing the retail sector of the economy, both in formal and informal forms of the market. The research aims to come up with a proposal for further development of the existing methods of fiscal interaction in the retail trade market through the example of Russia and Kazakhstan as the brightest representatives of the CIS countries, which can substantially reduce the informal activities in the sector of these economies, and thus improve the overall situation in the retail trade of the region.

This study considers trade as one of the sectors responsible for spurring economic growth, which also acts as a link between the market and the tax reforms. Its role in economic development has increased amidst changes made to the tax system in an attempt to eliminate potential market distortions. The analysis covers one year from 2022 to 2023. The focus lies on the CIS countries, particularly the Republic of Kazakhstan and the Russian Federation. While dependent on fossil fuels, these two countries look at the retail market as a potential route to diversify the national economy from oil.

The Commonwealth of Independent States is a rather fresh union of countries, although it derives from the previously well-built economic cooperation of the republic - members of the USSR. The regional and historical connections make it easy for all the new states to cooperate based on the previously-created ties; therefore, it might be presumed that all of the new countries are to be equally studied due to their inevitable inter-dependence in the market functionality. Yet, the present research has been confined to highlighting the situation in the markets of Russia and Kazakhstan due to the fact that these participants of the retail trade possess the biggest capacity to demonstrate the link between fiscal policy and retail trade transparency.

While Russia has traditionally been by far the largest player in the region with 75% of its GDP, the second largest remains Kazakhstan, making up 8% of the whole CIS GDP, which inevitably makes these countries the leaders in the routine retail operations both inside their economies and beyond, making them more typical to be analysed and then described in terms of formal and informal markets’ interaction with the taxation policies that can be utilised for all the other participants of the market.

3.1 Research materials and sampling

The study draws data from various sources: (1) existing studies on taxation and entrepreneurship by Kosta and Williams [12], Mambetalieva [15], and Sirkeci [10]; (2) materials released by the Federal State Statistics Service (Russia) for year 2021 and the Bureau of National Statistics (Kazakhstan) for years 2021 and 2023; and (3) 2023 reports from international organizations, i.e., OECD and WTO. Data collected from these sources was analyzed and processed using descriptive statistics. The results are presented as tables (Microsoft Excel) and histograms (MacType).

3.2 Methodological design and work stages

The study consists of three stages: (1) analyzing the retail trading landscape of the countries under study; (2) looking at all statistics and analytical data relating to trade taxation in Kazakhstan and Russia; and (3) assessing the effects of various tax solutions for formal and informal scenarios. The retail trading landscape assessed at the first stage of the study includes characteristics relating to the state of retail trade. These characteristics include the retail trade turnover, the structure of the retail market, the total number of marketplaces for retail goods (this includes open-air retail events akin to a fair, also known as “yarmarka”), and the total number of active market participants in the retail sector. This information was processed and imported into a table for further analysis.

Data relating to trade taxation was derived from the Eurasian Economic Commission’s 2023 Statistical Yearbook. The focus fell on indirect taxes: a value-added tax (VAT), excise tax, and self-employment (SE) tax. The value-added tax is levied on the difference between the tax paid on purchases and the tax collected on sales and is included in the final price of a particular product or service. Excise taxes are selective taxes imposed on goods and services that are intended for domestic consumption. To improve indirect tax compliance, the governments of Kazakhstan and Russia have introduced different tax regimes. Kazakhstan’s government has adopted the Single Aggregate Payment (SAP) system, which simplifies the registration of informal entrepreneurs, whereas the Russian government taxes the professional income of individuals who make and sell goods and services without hiring anyone (self-employed tax) and earn up to 2.4 million rubles per year. The data are presented as a summary table for further comparative analysis.

Data relating to the impact of indirect taxes on trade in the formal and informal sectors was derived from reports released by the Eurasian Economic Union [20]. This includes information related to special tax regimes (i.e., SAP and SE) and the core indicators of socio-economic development (i.e., trade and tax revenue as a share of GDP, income distribution by quantiles, and formal/informal employment in the trading industry). The proportion of formal and informal in the fiscal economic system was calculated according to the following equation: $\frac{a}{b}=\frac{c}{d}$ [21]. This ratio corresponds to the proportion of indirect taxes based on VAT as the principal tax revenue tool received from companies’ and individuals’ economic activity in businesses of different forms and sizes.

3.3 Methodological tools, formulas, and iterations

The study has been done using the traditional strategy of data compilation with further quantitative and qualitative analysis. The present-day fiscal strategies and tools of the retail sector in Russia and Kazakhstan were compared with the models that contain a more balanced approach to the use of taxation instruments for retail trade in the frames of formal and informal economies. Then the new recommendations were offered as a tool to increase the fiscal efficiency and overall economic transparency and sustainability of the retail companies of Russia and Kazakhstan as the brightest representatives of the CIS region.

3.4 Limitations

The study only focuses on two countries. Both have developing markets and export-oriented economies. The results may be only partially generalized to the scope of developing countries outside our sample.

3.5 Ethics of the research

All the materials and data under the analysis in the present articles are available for public access and subject to no copyright, thus there is no conflict of interest in the authors’ developments.

The present research has demonstrated a situation in the Russian retail trade sector compared to the one of Kazakhstan in terms of various tax arrangements’ influence on trading within the formal and informal economy.

The study is based completely on the matter of comparative quantitative and qualitative analysis between the fiscal policies in retail trade of the biggest CIS economies in order to figure out the efficiency level of the already-existing taxation schemes to the productivity, competition development, and sustainability within the frames of formal and informal economies, striving to bring the largest possible amount of the retail trade tax-payers out of the shadow economy [9, 25]. The retail sector of Russia and Kazakhstan can be used as a bright model to be followed not only by the CIS regions but also by other economies from Asia and Europe, due to the fact that despite the volatility of the retail sector these economies have been going through lately, they are managing to increase their GDP by the implementation of special tax regimes, those being the SAP (Kazakhstan) and the self-employed income tax (Russia). Just like any other country’s retail industry, the ones of the Republic of Kazakhstan and the Russian Federation depend largely on the market fluctuations connected with the global economic processes and crisis, which inevitably results in a number of small business operators’ attempts to use the tax evasion schemes. Therefore, these economies are in urgent need of implementing a more flexible, yet efficient fiscal policy that can allow them to add up to the national taxation profit, at the same time giving an incentive to the market players to comply with the fiscal regulations in the most beneficial way [11, 26].

Based on the current findings, the country’s internal market ensures business continuity within the country and is characterized by indicators related to domestic trading. In Russia and Kazakhstan, the retail infrastructure development is rather slow, as (1) there are not enough places for retail trade; (2) the available retailers are mostly legal entities; and (3) consumers generally spend more money on mass-produced items. These findings suggest that retail-market players in developing countries fail to consider what their audiences need in terms of products and services and that the existing institutional and market advantages are tailored to corporate actors. In addition, local consumers prioritize products that satisfy their most basic needs.

The original approach that had been proposed by Bargain et al. [27], Blokhin and Gridin [28], and Svirsky [4], has drawn similar conclusions, arguing that markets are important to international and local traders that seek to maintain critical functions of their businesses [4, 27], but the complex tax system implemented in the post-Soviet countries prevents individual entrepreneurs from coming out from the shadows [29], creating an imbalance between the number of individual entrepreneurs and legal entities [28].

The previous research findings have been taken into account and now there is a more precise understanding of how the fiscal policy is operating in the retail trade domain of Russia and Kazakhstan [6, 25]. The precise structure of the retail market depends on the income level and lifestyle of the country’s population. For stable economic development, having an effective mechanism of fiscal regulation is key, since taxes are the backbone of the national budget and an instrument to hold taxpayers accountable as trader entities. The descriptive statistics presented in this study show that Kazakhstan and Russia have similar tax systems and a large portion of their budgets comes from the VAT. In 2022, their tax legislation was transformed to bring the informal sector out of the shadows and to achieve economic diversification, i.e., one of the foundations of sustainable and inclusive, long-term growth [26]. In light of this event, it was decided to examine the effects of the new tax regimes on formal and informal domestic trading. Results show that low-income buyers in Kazakhstan and Russia make their purchases from the informal market, which represents the low-price segment of the internal market. According to some researchers, taxation efforts are more likely to affect the well-being of the elderly population than the income of working-age citizens [30]. In addition, government attempts to increase formal employment by taxing micro-businesses, as in the case of Kazakhstan and Russia [31], may be misguided [21]. Formalization strategies should focus on small, medium-sized and large organizations equally to provide more job opportunities to skilled workers and to reduce economic risks through diversification. Hence, it is best to encourage individual entrepreneurs to raise their financial literacy while promoting the integration of technology into trade businesses. Previous research shows that raising financial and tax literacy enhances the perception of fairness [32]. Another way to combat tax evasion is to formally reward business tax inspectors for refusing to accept informal payments [33], but only through comprehensive measures the government can limit corruption, for its financial source is shadow income generated through the concealment of revenue and other illegal actions [34]. The analysis of the quality and quantity of different legal forms and sizes of the enterprises in Russia and Kazakhstan proves that the comparisons are unlikely to coincide for large and small businesses, yet they bear no dependence whatsoever on the choice between entering the formal market through trading using the concepts of a supermarket sales or fairs, which calls for broadening the scope of research in the future in the attempt to diversify the taxation instruments for the small entrepreneurs that tend to keep evading taxes by a more eclectic set of fiscal instruments. The latter are expected to take into account the annual turnover and expenditures, rather than the choice of the form of retail performance and the grounds for consumer interaction.

The present findings indicate, however, that the example of Russia and Kazakhstan can be applied to the other economies of the CIS countries, whose individual entrepreneurs show a tendency to make their income mostly from trade business in a much smaller volume if compared to the retail trade companies operating in the form of legal entities, as evidenced by tax revenues to the country’s consolidated budget. The state’s efforts to support micro-business, in particular the self-employed, are currently directed towards the low-income individuals who try to survive by doing business in the informal sector, rather than towards the promotion of micro-business growth at a national level.

The Federal Tax Service of Russia has developed and released an app for those who are self-employed and wish to pay the self-employed income tax. The app called “My Tax” allows users to check their business for tax controversy every month before the tax payment date, and provides advice based on an automatically generated tax risk score. Users who select factors 1 to 3 can then “revise the operating conditions”, whereas those who pick factors 4 to 6 are instructed to “eliminate the violations”. In the scenario where factors 7 to 9 are present, the app will warn the user that the tax office may show interest in their tax operations. This matrix can also be used by organizations to assess the risk of incorporating self-employed individuals into their workforce, as companies that benefit from informal employment may be held liable for not paying the full amount of taxes (the income is taxed at 13%, or 15% if it exceeds 5 million rubles) or fined under Article 123 of the Tax Code. Evidence collected via My Tax may thus help hold the tax-evading company accountable [35-38]. Moreover, due to the fact that the companies operating in the retail sector of Russia and Kazakhstan in the form of self-employment taxation mode, show the potential capacity to increase in number and therefore add up to the transparency of taxation in these countries, it is highly recommended to elaborate on the functions of such fiscal policy as a promising tool for implementation in the other regions of the CIS, including the economies with a rather low level of small entrepreneurship activity, to considerably decrease the number of small businesses operating in the informal markets, which, in its turn, is bound to cut down on the number of shadow operations and tax evasion cases in the retail trade of the CIS countries.