Russian 2001Tax Harvest Up 50% On 2000

by Tatiana Smolenska, Tax-News.com, Moscow

21 January 2002

The Russian Ministry of Taxes and Levies has announced that in 2001 it raised revenue of R961.3bn (Euros32bn), 50% more than in 2000, and 23% over budget. Tax receipts represented 10.6% of GDP, up from 8.7% in 2000.

In 2000, President Vladimir Putin eased taxation, to encourage greater public respect for tax obligations. Tax on personal income was reduced to 13% on Jan 1, 2001, and the corporate tax rate was reduced to 24% from 35% on Jan 1, 2002.

Although the Government will have reaped a substantially increased tax harvest from its thriving oil and gas industry during 2001, with high world oil prices contributing to a substantial budget surplus, some of the increased tax take is undoubtedly due to the gradual acceptance by ordinary citizens of the need to enter a conventional bargain with the state - something wholly absent from the Russian psyche in 1990 after 60 years of Bolshevik economics.

Direct salary taxation is in any case only one part of the picture: even if lower direct taxation is encouraging individuals out of the black economy, the 'minimum single social tax' which pays for pensions and other social benefits is still very high at more than 30% of gross salary, and acts to persuade businesses to understate salary levels. In a recent interview, Chairman of the Russian State Duma Committee on the Budget and Taxes Aleksandr Zhukov explained why it was difficult for the Government to reduce pension contributions:

" The government, particularly the Pension Fund, is afraid that a shortage of funds may be experienced after the adoption of the new pension system. According to their estimates, the 2002-2003 period is less favourable in demographic terms and therefore, they are not ready to countenance a substantial lowering of the tax rate. It is difficult to say how the situation is going to develop in reality. After all, wages are being substantially raised and, in principle, funds obtained through the levying of the social tax should increase. However, this cannot be said with absolute certainty. Those kinds of risks always exist and are combined with the possible lowering of economic growth rates, with uncertainty in the implementation of the budget as a whole due to major fluctuations in prices for oil, gas, and metals. If the government's position were not so strict we would countenance the lowering [of the social tax rate]. However, in this situation we cannot act against the will of the executive branch and all those responsible for compliance with the state's commitments with regard to pensioners."

Further progress to reduce nominal tax levels in 2002 may focus more on small businesses. Mr Zhukov said: "The simpler the taxation system applied to small businesses the better."

The Ministry of Economic Development and Trade included major simplification of the system of taxation of small businesses on its slate of tax measures written in for 2002, along with abolition of the foreign currency purchase tax, and replacement of the property tax with a real estate tax.

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