While the Economic Development Ministry on Wednesday came out again in support of the proposed measure, which also has the backing of President Dmitry Medvedev and Prime Minister Vladimir Putin, the Finance Ministry remains seemingly entrenched in its view that a VAT cut would destabilize the economy, at least in the short-term.

Countering Finance Ministry claims that a cut in VAT, currently 18%, by the proposed 5-6%, would stoke inflation, Deputy Economic Development Minister Stanislav Voskresensky argued, according to a Prime-Tass report, that the move would actually help to reduce inflation.

Kudrin however, remains adamant that the proposal in its current form would be "destructive" and that a VAT cut should not be attempted until after 2010. He also contends that a reduction in VAT by the levels being proposed would blow a huge hole in the government's tax revenue.

"A reduction in VAT now would force a postponement of other tax initiatives," he was quoted as saying by the English language news channel Russia Today. He added that the government should concentrate first on improving tax administration.

In his keynote speech at the Russian State Council’s meeting in February, outgoing President Vladimir Putin called for a reduction in VAT to between 12% and 13%. The proposal was also included in Medvedev's election programme prior to the Presidential elections on 2nd March. Medvedev has subsequently placed tax reform at the top of his fiscal agenda, but the Finance Ministry, which has responsibility for balancing the budget, was always expected to oppose the move to cut VAT.

Supporters of a cut in VAT, which has been debated for some years, argue that it would boost economic growth by 0.7% within two years and encourage more taxable activity, thus reducing the size of the black economy. The Finance Ministry however, has warned that a 5% cut in the rate of VAT could wipe 1 trillion roubles (USD40.7 billion) off of the government's tax take.

Unsurprisingly, the business lobby is in favour of a VAT cut and believes the government has room to go beyond the current proposals and reduce the rate to as low as 10%.

Anton Danilov-Danilyan, Chairman of Business Russia’s Expert Council, is reportedly of the view that a cut in VAT to 10% would lead to a loss of revenues of less than half that being suggested by the Finance Ministry, while Aleksandr Murychyov, Vice President of the Russian Union of Industrialists and Entrepreneurs, has said that this would release trillions of roubles for investment.

"Part of this cash could go on new equipment and the introduction of new technology. This would allow the creation of more small and medium enterprises and follow the course of diversification of the economy away from the needs of the oil sector," he argued, according to Russia Today.