Russian Tax Cuts Presented To The Cabinet

by Tatiana Smolenskaya, Tax-News.com, Moscow

24 April 2003

Proposals for a major package of tax cuts designed to reduce Russia's tax burden by three percent of GDP next year have been presented to the Cabinet who will consider the 30 page report this week.

A Moscow Times report indicates that contained within the proposals are plans to both reduce and simplify the VAT structure in addition to reforming the unified social tax paid by employers on behalf of their workers. By reducing VAT from its current level of 20% to 18% it is hoped the tax burden will shrink by 0.7% of GDP, though this would deprive state coffers of some 100 billion rubles ($3.2 million) next year in the process. In addition, streamlining the tax for the construction industry will shave a further 0.4% off the total tax burden.

On the unified social tax front, the plan calls for the introduction of a single flat rate, regardless of salary, to replace the current regressive taxation system. At present, an employer pays 35.6% unified social tax on incomes up to 100,000 rubles ($3,125) and 20% on salaries from 100,000 to 300,000 rubles ($9,646). The Finance Ministry has the intention of merging the two brackets so that a flat rate of 26% is paid on all salaries. This move would see Russian employers paying less for workers earning below $8,340 per year, though contributions would start to increase above this level. Nevertheless, it is claimed the measure would reduce the national tax burden by a further 1.1% of GDP.

The elimination of sales tax (approved by the government and sent to the Duma this spring) and the phasing out of other more obscure taxes would reduce the tax burden by an additional 0.9%.

The rationale behind these moves is the hope that employers will be able to pay workers more therefore boosting consumption and in turn, production. The government also intends to claw back some of its lost revenue by increases in sin taxes such as tobacco and more significantly through levies on mineral extraction and increases on natural gas export duties. Property tax reform is also likely.

Whilst these measures are expected to lift the economy somewhat in the short term, the finance ministry conceded in the report that certain structural and cultural changes need to take place in order to address the underlying ills of the Russian economy.

"A favorable taxation system cannot compensate for ... the Russian economy's low competitiveness, such as technological backwardness, macroeconomic problems, the inefficiency of government institutions and an unattractive investment climate," the ministry said in the MT.

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