Russian Tax Cuts To Be Phased In Over Next Three Years

by Tatiana Smolenska, Tax-News.com, Moscow

25 April 2003

The Russian Cabinet has approved in principle the Finance Ministry's package of tax cuts after a meeting on Wednesday, although the planned cuts in VAT and the unified social tax will likely be phased in over a greater length of time than first thought, in order to cushion the shock to the government's coffers.

"The decision, in principle, has been taken," explained First Deputy Finance Minister Sergei Shatalov, the man behind the reforms, according to Reuters. "My report received general support and the measures were approved," he confirmed.

The lynchpin of the plan is the reduction of VAT from 20% to 18% which is set to come into effect on January 1st 2004. It is hoped that this will boost economic growth by between 0.5% and 1% over the next three years, according to Shatalov.

A further cut in VAT to 16% is being considered for 2006, when the Finance Ministry may also end the preferential zero rating for goods such as baby foods, as well as the 10% rate currently levied on industry sectors such as pharmaceuticals and the media.

The reform to the unified social tax structure is being earmarked for 2005. This levy provides the bulk of the revenue for medical and welfare benefits, and is paid for by employers according to workers' salaries. The new single flat rate of 26% will effectively result in a 5.7% cut in this tax, according to Finance Ministry calculations.

To compensate for the loss in revenues, the government is increasing gas export duty from 5% to 20% and the oil extraction levy will be 5% higher, resulting in a rise from 340 rubles ($10.93) per metric ton to 357 rubles ($11.48) per ton.

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