Publication: Monitor Volume: 4 Issue: 124

The main feature of the tax changes is a shift from taxing producers (who hide behind mutual arrears and barter transactions) toward consumers. Prime Minister Sergei Kirienko explained that “[m]oney should be taken wherever there is money.” The initial six bills alone would, if accepted and enforced, boost federal and regional revenue by a net total of 37 billion rubles (US$6 billion). Kirienko also pledged to clamp down on offshore tax havens and–a familiar refrain for centuries past–tighten state control over the alcohol industry. Starting August 1, VAT will be levied when goods are shipped, and not when (if) clients pay. (Izvestia, June 27, Rossiiskaya gazeta, June 25)

A new five percent regional sales tax would be introduced, of which one percent would go to the federal budget. The income tax will be overhauled, with three levels of payment (12, 20 and 30 percent). Non-wage income would be taxed at 20 percent–currently, for example, interest on bank accounts is untaxed. Ten percent of the income tax will go to federal coffers and 90 percent to the regions. The revised income tax should generate 10 billion rubles and the sales tax 40 billion in the first year. At the same time 14 billion of diverse local taxes would be abolished. Profit tax would be cut from 35 to 30 per cent, split 18-12 between the regions and the center. This would lower business taxes by 11 billion rubles. (Rossiiskaya gazeta, June 26)

This is a fairly radical set of measures, and definitely a move in the right direction. For too long, Russia’s minority of upwardly mobile consumers have had something of an easy ride. The key question, as always, is does the government have the political authority and administrative capacity to implement these measures?

There are already some signs of backsliding on earlier pledges to get tough on the oil companies. The government ordered oil exporters to pay their tax arrears by July 1 or be denied access to export pipelines. Now it turns out that companies needing to pay off foreign loans will be exempt. Similar, promises to refuse to tolerate tax arrears (accepting current taxes while rolling over tax arrears) are being fudged. Russian legislation is like Swiss cheese, except there is more hole than cheese. (Moscow Times, June 27)