Kremlin Discusses More Tax Cuts, Although Government At Odds Over VAT

by Tatiana Smolenskaya, Tax-News.com, Moscow

24 March 2006

Russia's Deputy Finance Minister, Sergei Shatalov has urged the government to forge ahead with plans to trim the tax burden further, although the Kremlin appears to be at odds with itself over a proposal to cut value added tax by a further 5%.

Shatalov reportedly told a cabinet meeting, which was held on Wednesday to discuss next year's budget, that the government must continue with its ongoing efforts to cut taxes, including a long-awaited tax break for developers of new oil fields.

Since 2002, the Putin administration has reduced or abolished a number of taxes, including turnover tax, payroll taxes, sales tax, and value added tax, which has already been cut to 18% from 20%.

However, the Finance Ministry is said not to be keen on a proposal to cut VAT by an additional 5% to 13%, an idea being championed by Prime Minister Mikhail Fradkov, who favours using the tax system as an instrument to promote economic growth.

The VAT issue was not discussed at the latest cabinet meeting, and Shatalov has indicated that the proposal needs further evaluation before it can be approved.

It is believed that the Finance Ministry is luke-warm on the VAT reduction because it may fuel inflation. President Vladimir Putin has set a reduction in the Russian inflation rate to single figures as "a main priority" for the government's economic policy, as inflation ran at 10.9% in 2005.

The Finance Ministry also fears that such a large cut in VAT would increase budget dependency on oil revenues. According to the ministry, a 5% cut in VAT in 2007 will cost 523 billion rubles (US$18.8 billion) and an additional 620.2 billion rubles in 2008, Kommersant reported.

However, it would appear that the Finance Ministry is more keen on simplifying VAT laws for businesses, and Shatalov told reporters on the sidelines of Wednesday's meeting that a new registration procedure is being explored which could exempt small companies from VAT.

Other tax law changes under consideration by the Kremlin include a change in the minimum capital requirement for businesses - a move designed to crack down on the use of abusive tax shelters.

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