Russian Retailers Urge Temporary Sales Tax To Be Scrapped

by Tatiana Smolenska, Tax-News.com, Moscow

29 May 2003

Some of Russia's largest retailers are lobbying lawmakers to phase out a temporary sales tax introduced in 1999 as a stop-gap measure to help the federal government stave off bankruptcy.

The 5% tax is set to expire at the end of the year, although it is unclear whether the authorities will be willing to give up the extra revenue generated by the levy. The Finance Ministry has estimated that eliminating the tax will deprive regional budgets of around $2 billion a year in tax revenue. Moscow's Mayor Yury Luzhkov has warned that the city will be a substantial loser, claiming that 10%, or $1 billion, will disappear from its tax income.

Retailers have pledged to cut their prices by a corresponding 5% if the government goes ahead with abolishing the sales tax. A coalition of retailers, including, among others, Sedmoi Kontinent and grocery chain Paterson, recently wrote to the speaker of the Duma explaining that the retailers would have nothing to lose from dropping their prices by 5%, as they forecast an increase in sales of around 15% after the tax is eliminated.

However, this gesture has been greeted with some cynicism in governmental circles, according to the retailers: "We have promised the [deputies] to cut prices by 5 percent if the tax is abolished, but they reacted with ... total distrust," Vladimir Karnaukhov, a member of Sedmoi Kontinent's board, told the Moscow Times. Meanwhile, Luzhkov is also deeply sceptical that the retailers would follow through on their promise, and announced that in his opinion, eliminating the tax would be "pointless."

However, according to recent reports, some legislators have let it be known that they will be unsupportive of the Finance Ministry's package of tax cuts- scheduled to be phased in over the next three years- if the sales tax is not retained. Therefore, with the stakes seemingly quite high, the retailers look likely to be facing an uphill struggle to get the tax overturned.

Observers have suggested that perhaps it would be wise of Finance Minister Alexei Kudrin to point out the inefficiencies of the sales tax to those threatening to scupper the much debated tax reforms. According to government estimates, total retail sales in Russia stood at 4.7 trillion ($152 billion) last year meaning that regional governments should have collected 250 billion rubles in revenue. However, according to reports, actual revenue was nearer 50 billion rubles.

Despite these hurdles, Kudrin appears confident that the tax package, which will reduce VAT to 18% and lower social taxes, will clear the Duma "in the same form it was submitted," according to the Moscow Times.

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