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Russia Today
NZ Dept of Statistics Crown Accounts Analysis for year ended 30 June 1999.

Russian Government Approves Radical Tax Reforms

MOSCOW, May 26, 2000 -- (Agence France Presse) Russia's government approved a radical tax reform package on Thursday in its first meeting since President Vladimir Putin put two liberals in charge of the country's finances.

"We have to stop lying to ourselves, and say that we are not helping the poor," said Economic Development and Commerce Minister German Gref in televised remarks after the cabinet meeting.

"We do not collect taxes from the rich. The rich have enormous opportunities to evade taxes," he said.

The government program, which must win approval from the State Duma lower house of parliament, radically overhauls Russia's Soviet-era tax code which economists blame for stifling businesses and encouraging corruption.

The plan completely eliminates a tax on business turnover and introduces a flat 12.9 percent income tax that replaces the existing 12-30 percent scaled taxes.

The government hopes that lower tax rates will encourage Russians to report larger portions of their incomes and stamp out the shadow economy which runs parallel to legal business.

Part of the initial government revenue losses will be compensated by a complete restructuring of Russia's tax-exemption system and the elimination of poorly-aimed social assistance programs which do not reach the needy.

Russia also plans to hike the gasoline (petrol) tax six-fold, a proposal which is likely meet stiff resistance in parliament.

Government estimates that prices at the pump should rise by 25 percent on some grades of gasoline as a result.

"This is not a dramatic increase," Deputy Finance Minister Sergei Shatalov told reporters, noting that prices would not be raised on diesel fuel "which is important for the army and agriculture."

Putin has already asked the Duma to delay its summer recess until July 7 in order to swiftly approve the tax reform legislation.

Putin Backs Russian Tax Reform in Letter to Duma

MOSCOW, May 24, 2000 -- (Reuters) Russian President Vladimir Putin backed radical tax reforms including a single income tax rate in a letter sent to the lower house of parliament on Tuesday, Finance Minister Alexei Kudrin said.

The State Duma needs to pass the bills before a July break if next year's budget are to include the changes, since a budget by law has to be based on acting law, he told a news conference.

The cabinet would look at main 2001 budget parameters on June 1, he added.

But Kudrin backed away from plans to press parliament to pass a second set of changes criticized by a senior Duma member, liberal budget committee chief Alexander Zhukov.

Zhukov's committee has already begun considering proposals for a new tax code's second part that sets tax rates. Russian tax reforms aiming to plug loopholes and ease the tax burden are based on the code, which has been in the works for years.

Recently parliamentary blocs have been waiting for Putin to take a stand on various proposals.

"Vladimir Vladimirovich Putin has written the following goals: a decrease in the tax burden... (and) equal terms for all tax payers," Kudrin said.

Putin backed a flat income tax designed to encourage the wealthy to pay taxes, dropping a tax based on a company's turnover, rather than its profits, and cutting social taxes.

Kudrin said that meant the income tax rate would be a flat 13 percent instead of the current scale rising to 30 percent.

In sum the government wanted to cut the nominal tax burden, now 41 percent of gross domestic product (GDP), by two percent of GDP for each of the next two or three years, Kudrin said.

Foreign and domestic companies for years have called for changes to the tax system, cobbled together after the breakup of the Soviet Union.

Recent economic growth, helped along by the 1998 ruble devaluation which made domestic manufacturers competitive and high prices of key exports, energy and metals, has left some wondering if the state would shrug off reforms.

Kudrin said it would not: "These factors are temporary and economic growth cannot be considered dependable. The government must take measures so that the economic growth is stable."

But he backpedaled on pledges by his first deputy, Sergei Shatalov, who heads the ministry's tax reform efforts. Shatalov had said changes to a first part of the tax code previously passed would also be rushed through by parliament's July break.

"After we finish work on the second part, we will turn our attention to and put the accent on the first part," Kudrin said.

By VLADIMIR ISACHENKOV

MOSCOW, May25, 2000 - In its first major economic policy move, President Vladimir Putin's government on Thursday unveiled a sweeping plan to revive Russia's anemic economy by lowering the tax burden and imposing a flat 13 percent income tax.

The plan - which is expected to win parliamentary approval this summer - would also boost taxes on gasoline and tobacco.

The flat tax would replace the current progressive income tax, which now ranges from 12 percent to 30 percent. The plan would also remove a widely criticized tax on business transactions and allow a range of tax deductions for business expenses, such as advertising and property insurance.

"The time has come for the government to make a decision to lower the tax burden," Prime Minister Mikhail Kasyanov said at a Cabinet meeting. "This will stimulate production, broaden the tax base and encourage economic growth."

The government also plans to streamline the convoluted tax system, abolishing some taxes that have proven ineffective and combining others into a single flat charge.

If approved by parliament, the changes will take effect next year. Last year's parliamentary elections ended the legislative dominance of the Communists, who had blocked many reform efforts.

The proposals were greeted favorably by analysts.

"I think that this reform offers something to everybody," said Niina Pautola, chief economist at the European Center for Economic Reform in Moscow.

"As far as a vehicle to promote investment, it's a very nice symbol of things to come," said American Chamber of Commerce President Scott Blacklin.

Critics of the current system say the high tax rates and confusing system have stifled investment and encouraged widespread tax evasion.

Economic Development and Trade Minister German Gref, a key author of the tax reform plan, cited the current business transactions tax as a particular problem. It effectively equals a 44 percent tax on the profits of an enterprise, and when added to the existing 30 percent profit tax, it forces a company to pay taxes of more than 70 percent on profits, he told reporters.

In recent years, Russia has had difficulty collecting taxes; proponents of the reforms say lowering the income tax would help increase tax revenues by encouraging individuals and companies to declare their real wages.

"We don't know that yet," Pautola warned. "It is definitely a risk."

Gref dismissed allegations that a flat income tax rate would only benefit wealthy taxpayers, saying that only 0.1 percent of tax revenues comes from those in the highest income bracket.

"We're not collecting taxes from the wealthy," Gref said. "The rich have a huge number of opportunities to leave and not pay their taxes."

The government also plans to compensate for the cut in tax rates by canceling many exemptions and privileges granted to companies. Economic experts have long urged the Cabinet to make the move, saying that such privileges sap the government's revenues and encourage corruption.

At the same time, the government proposes to increase some taxes which have proved easier to collect, such as levies on gasoline, which would increase six-fold, and the excise tax on tobacco, which would double. The gas tax increase would cause a nearly 30 percent hike in prices at the pump, said First Deputy Finance Minister Sergei Shatalov.

The budget committee of the State Duma, or lower house, began discussing the government proposals Thursday.

The plan faces good prospects in the Duma, dominated by pro-Kremlin parties which have already voiced their support for the proposed reforms. Putin sent a letter to parliament earlier this week outlining the proposal.

The Duma is expected to approve the changes before adjourning for summer recess in July.