Kremlin's Top Advisor Calls For Tax Reform

by Tatiana Smolenskaya, Tax-News.com, Moscow

04 December 2006

The Kremlin's chief advisor has once again called upon the government to consider widespread changes to the Russian tax system, including the replacement of value-added tax with a sales tax system.

Arkady Dvorkovich, head of the President's expert advisers group, said last week that current tax policy is inhibiting the growth potential of companies in certain sectors such as telecommunications, and argued that tax reforms must be drafted before the three-year budget in 2008.

"(The current tax system) won't serve the interests of the Russian economy in the next five to seven years and should be changed," Dvorkovich stated at a round table discussion, according to the Prime-Tass news agency.

As well as drafting new sales tax legislation, he urged the government to cut the unified social tax and restore profit tax breaks for investment.

Dvorkovich believes that a switch to a sales tax would be beneficial because the current VAT system is becoming increasingly complex to administer.

VAT in Russia is currently levied at 10% for 'socially important' goods such as food staples and children's clothing, and 18% for all other goods, although the government has been mulling a uniform 13% VAT rate.

Dvorkovich said that the switch to a sales tax could take place over a transition period between 2009 and 2011 without any major disruption.

However, his views are not supported by the Finance Ministry, which has said that there is no compelling reason why the government should replace VAT with a sales tax.

"I don't think that VAT will be replaced with a sales tax and this will likely be for the long-term. I think the government will stand by this," Deputy Finance Minister, Sergei Shatalov told a tax reform seminar in September.

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