Russian Trade Ministry Opposed To Further Cuts In VAT Rate

by Tatiana Smolenskaya, Tax-News.com, Moscow

03 November 2005

An official from Russia's Economic Development and Trade Ministry told an investment conference in the United States on Tuesday that the department is opposed to any further cuts in the rate of Value Added Tax.

Addressing the the 9th Annual US-Russian Investment Symposium in Boston, Deputy Minister Andrei Sharonov stated that it would be "unwise" for the government to "play risky games" with such an important source of tax revenues in the light of high global energy prices.

"In our opinion, VAT is not the worst tax. Last year, it accounted for a third of the revenues of the federal budget, which is, mildly speaking, burdened with obligations," Mr Sharonov observed.

The deputy minister reportedly went on to identify the unified social tax as a more troublesome levy because it encourages companies to hire workers illegally and distorts economic activity.

Sharonov's comments highlight a potential rift within the Russian government on tax policy after Prime Minister Mikhail Fradkov called upon the Finance and Trade ministries last month to draft plans for a 5% cut in value added tax, (currently at 18%) beginning in 2007 to help accelerate the pace of economic growth.

The government estimated that cutting VAT by 5% will increase economic growth by 0.5% of GDP, thus helping President Vladimir Putin to meet his pledge to double GDP over a ten year period.

Since 2002, the Putin administration has reduced and abolished a number of taxes, including turnover tax, payroll taxes, sales tax, and value added tax, which was recently cut to 18% from 20%.

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