Bureaucracy Stifling Russian Small Business Reforms

by Tatiana Smolenska, Tax-News.com, Moscow

26 July 2002

Russian Economic Development and Trade Minister, German Gref, was behind measures to help small business, including a new tax law which allows businesses with less than 100 employees and annual revenues of lower than 15 million roubles ($477,100) to chose between a 6% revenue tax or a 15% tax on profits, but is now faced with a World Bank study which says his antibureaucratic laws have had the opposite effect to what was intended.

Mr Gref said the results of the study were discouraging and asked the government to take "more radical and effective measures" to eliminate bureaucratic excess. Small businesses in Russia account for a mere 12% of gross domestic product in Russia, compared with 70% in parts of Western Europe (although much of their activity is unrecorded since it is driven underground by taxes and bureaucracy.

Mr. Gref's ministry has pushed through laws to speed up and simplify business-registration procedures, cut back on state inspections which often lead to fines, and reduce the number of costly licenses and permits companies need to function.

But a survey of nearly 2,000 small enterprises across Russia by the Center for Economic and Financial Research and the World Bank showed those reforms that had come into force when the study was carried out had little effect. "Firms see little improvement to date, and claim the situation is getting worse on some administrative barriers," the study said.

A new law specified that inspections can't take place more than once every two years, but the study found the number of checks by all agencies actually increased after the law was introduced. It also found the cost of such checks in terms of spot "fines" (= bribes in many cases) had increased.

The study says that the extent and cost of regulatory burdens increase as a company grows, discouraging innovation and growth. "Small and medium-size enterprises face a regulatory 'glass ceiling,' beyond which growth attracts costly administrative interference," the report said.

Meanwhile the government continues to introduce reforms, including a new 'transportation' tax which will come into effect from January next year, replacing the road-user tax, which amounts to about 1 percent of a company's revenues. The road-user tax, which is the only remaining turnover tax in Russia, disproportionately impacts new businesses and is a major disincentive for investment. According to the government's estimates, the repeal of the road-user tax will allow the overall tax burden on companies to fall by 170 billion rubles ($5.4 billion) to 180 billion rubles.

Recommended