The Foundry

Amid a severe economic crisis Russia, along with many other nations, is facing grave difficulties in replenishing the federal budget. With the government continuing to task the government agencies in charge of the budget with ensuring maximum revenues, Federal Tax Service, the Economics Development Ministry and the Finance Ministry are coming out with various proposals for covering the budget deficit.

Federal Tax Service has been extremely anti-market in its proposals. One of the most odious is to impose a levy on all financial transactions at a fixed rate of 0.5 percent. This measure would seriously affect the interests of corporations and industries that rely heavily of supplies and middlemen and would dramatically hike production and service costs. It is unlikely to bolster budget revenues but would rather push an array of key industries away from the banking system towards shady deals.

Five leading taxation experts, independently of each other, reportedly denounced the proposal calling it “stupid,” “unfair,” “ugly,” “irrational” and “out of a fantasy world.” Even the Finance Ministry which incorporates FTS is against the measure. Thus, the chances the initiative will get passed are negligent.

The other FTS-originated measures are also repressive in nature. One of them suggests introducing additional registration of VAT payers that would subject companies to a new round of registration with government agencies. Another FTS measure is designed to extend the tax arrears collecting term from one to three years. Yet another proposal involves granting FTS license to overrule a banker’s discretion principle by allowing it access to the Central Bank’s and Financial Intelligence’s databases.

More rational and market-oriented are the Economic Development Ministry’s anti-crisis tax initiatives. They are based on the sound idea that tax cuts rather than tax hikes are mandatory for economic growth and covering a budget deficit. It is proposing to postpone a raise in social security taxes, the Ministry of Health initiated last year, and lower the profits tax burden. It also envisages additional tax breaks for companies undergoing modernization and also to promote power-saving.

The Economics Development Ministry’s proposals concerning small businesses seem quite appropriate. First, it proposes to dramatically enlarge the list of enterprises that are authorized to use a simplified tax-payment form. Today, their turnover ceiling is around $800,000 a year, while the Ministry is boosting it to $3 million. Second, it proposes to grant provincial governments the right to cut the profits tax rate to zero for such enterprises in order to stimulate employment, productivity and competitiveness of small business.

Eventually, it is the Finance Ministry that will have the last word in the interdepartmental spat over anti-crisis taxation plans, and its position is quite equivocal. On the one hand, the Ministry leadership realizes that bolstering federal taxes is going to hamper business development and economic recovery rather than rescue the federal budget. On the other hand, small business tax cuts right down to zero are getting a skeptical treatment, since they are bound to produce an immediate slide in tax revenues, while yielding fruits is only for a distant future.

The Finance Ministry’s intellectual effort is going to translate into a fairly hefty document titled 2010-2012 Taxation Policy Guidelines. But it is dragging out owing to disagreements between the government agencies and – more importantly, – between two conceptual – statist and market – approaches within the Russian government over the ways to achieve an economic recovery.