Russian Government Remains Divided Over Proposed Tax Cuts

by Tatiana Smolenska, Tax-News.com, Moscow

17 March 2003

The Russian government met at the end of last week to discuss the possibility of tax cuts to be introduced in 2004.

It is known that there is some division in the Russian hierarchy as to the extent of the tax cutting program, with Prime Minister Mikhail Kasyanov wanting much more wide ranging cuts than the Finance Minister, Alexey Kudrin, is prepared to give.

According to a report from news agency Pravda, a government source revealed Kasyanov's dismissive attitude to Kudrin's proposals, which he preferred to call: "a number of measures, some of which are good" rather than a programme of reform.

Speaking earlier in the year on the subject, Kasyanov said that he favoured the immediate introduction of a package of stimulative measures in the tax sphere, and that rather than using the expected budget surplus to pay down state debt, it would be better to reduce taxes. Announcing that the Government's work over the last three years had already seen a reduction in the overall tax burden equivalent to 3% of Gross National Product, Mr Kasyanov proposed a reduction of 3% in the rate of VAT- currently at 20%, as it has been since its introduction nearly ten years ago. This would reduce the tax take by a further 1% of GNP, the Prime Minister explained.

Kasyanov was pessimistic however that a revised draft would be ready in time for the April 1st deadline which the Cabinet has set for the Finance Ministry. This means the package will not be put before the Duma for approval in the spring session, and therefore will not make it into the budget due in the autumn. "The government probably won't be able to improve the situation in the economy through tax measures before next year," Kasyanov said adding: "We still have a chance, but we need to move fast to use it."

Experts agreed that there is a growing schism between the Prime Minister and the Finance Minister asnext year's presidential elections approach. Christopher Granville, a political analyst at United Financial Group, observed: "Kasyanov wants the more radical and ambitious tax reform, while Kudrin, like any finance minister, is more cautious. So while the former wants to cut taxes more radically, which will get him popularity and support from businesses in the pre-election period, the latter prefers to be more conservative."

Another area where a potential split could occur in the government is taxation of oil revenues. The Finance Ministry is known to be keen on higher taxation of Russia's lucrative oil industry in order to foster growth in more fragile areas of the economy. However, it is thought this too may be a politically sensitive area for the cabinet with elections looming. "I wouldn't be surprised if the government does not find enough arguments to raise taxation for this politically important sector before the election," James Fenkner, chief strategist with Troika Dialog predicted.

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