Deputies Express Overwhelming Support For Tax Cuts

by Tatiana Smolenska, Tax-News.com, Moscow

17 June 2003

Members of the Russian State Duma showed emphatic support last week for the first reading of the tax cut package proposed by the finance ministry, the most significant aspects of which include phasing out of the controversial sales tax and a cut in VAT from next year.

Commenting on the outcome of the vote, First Deputy Minister of the Finance Ministry Sergei Shatalov, the brains behind the tax relief package, reportedly announced that: "(Passing this package) is a strategic, timely and correct decision" as lawmakers, up for re-election in December, endeavour to meet President Putin's challenge of doubling the economy inside ten years.

However, the tax cuts have come at a price, and this is going to be paid largely by firms in the natural resources sector. Whilst the present system of excise on natural gas is being abolished, the tax on gas production is increasing four-fold to 20% from next year, although Finance Minister Alexei Kudrin has indicated this may be reduced in the bill's second reading. Additionally, tax on oil production will increase from 340 roubles per metric ton to 357 roubles ($11.70).

The phasing out of the temporary sales tax introduced by the federal government in 1999 to help stave off bankruptcy has not been a popular choice with the regional authorities, who claim to rely on its revenue. Shatalov though, has pledged to make up the 60 billion rouble shortfall that this will create by diverting a portion of business tax to the state governments, in addition to a 1% share of federal income tax and excise duties on alcohol.

According to Shatalov, this version of the bill- if passed into law- would reduce the overall national tax burden from 31% of GDP to 27% after three years. The minister also said that by this time, the programme of tax reform initiated shortly after President Putin assumed office would be complete. No plans exist for further cuts after that, he revealed, save for the possibility of another reduction in VAT to 15%.

The latest vote follows the Duma's recent approval of a larger than expected cut in payroll tax worth 270 billion roubles ($8 billion).

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