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Moskovskiye Novosti, June 10, 2002

Reform Has Lost Its Way
Small Businesses and Lorries Will be Hardest Hit

by Dmitri Dokuchayev

A number of important fiscal draft laws were examined by the Duma during the spring-summer session that has just ended. We asked Deputy Chairman of the Duma Committee on Budget and Taxes Mikhail Zadornov to comment.

Unlike last year, when the Duma passed a number of wise decisions to weaken the fiscal burden, it is difficult to give a simple verdict to the results of the recent session. It is good that the Duma continued the policy of completing the Tax Code by creating certain chapters: for example simplified taxation of small business and production-sharing agreements. The deputies also passed a decision to abolish from next year turnover taxes, the tax on currency purchases and the securities tax. In other words the Duma has continued to abolish "harmful" taxes. Thus, the trend of reducing the tax burden and the number of taxes continues.

At the same time I would not risk assessing all the changes as positive for taxpayers. Many of these changes were adopted on political orders and did not result from an accurate assessment of their economic consequences. One typical example here concerns the adoption of the chapter on simplified taxation of small business. This was made on the direct orders of the President. I would like to recall here that the leaders of the four centrist factions came to the meeting with the President with one position and left with a totally different position and finally supported the presidential draft. However, when the draft was discussed in our Committee, everyone agreed that it did not provide any real tax leverage for small business. The Committee proposed transferring considerable part of small business onto patent to simplify the situation. The Government, however, was inclined to impose re-registration and more complicated reports for small business. After realising that the four centrist faction had adopted their political decision, the Committee withdrew from attempts to amend the draft. This was our principled position: the Government should be responsible for the consequences of their decisions. I am convinced that entrepreneurs will lose out owing to the restrictions and tax rates envisaged by the law. It does not create any conditions for legalisation of small businesses, even though most of them today simply do not pay taxes. Most unfortunately the law requires small businesses to maintain full-scale accounting which they will find difficult to implement technically and quite costly.

Most of the population will be affected by the consequences of the decisions to increase excise duties on alcohol, tobacco and petrol. But they will have different impacts on our wallets. Excise duties on beer and tobacco on the price of these goods in Russia are four or five times lower than the average in Europe. Certainly, it does not make life easier for people: everyone is used to cheap cigarettes in Russia. But I think that tobacco prices (despite a 70% increase in duties) and beer prices (25% increase) will demonstrate a minimum rise. An increase of 1-1.5 roubles for expensive cigarettes and 50-60 kopecks for cheap cigarette is unlikely to have a serious impact. Similarly I think beer prices will rise on average by 3-4%. This is a sector with high competition, where demand dictates price restrictions here.

The rise of excise duties on petrol, diesel fuel and motor oils will be quite high - by 45%. In addition the duties will be now paid by the last trader before retail trade (i.e. the oil-base which is the direct supplier of petrol to petrol stations), instead of the 20 or 30 oil refineries in Russia. As the whole system of excise duties is being changed, it is difficult to calculate all the consequences. But I am convinced that the oil companies will try to preserve their profitability and finally transfer this rise to the consumer; furthermore they will not do this at the moment of introduction of this duty, i.e. from January 2003, but far earlier. We are already observing this process: real petrol prices have already increased by 15%. I think that oil companies will win another 10-15% by the end of this year.

On the other hand, the struggle between oil companies, the present owners of petrol stations and local authorities over control of these oil bases and retail trade will take place in a new fiscal situation. This process is likely to clean up the situation around petrol stations. It is a well-known fact that petrol stations are often controlled by criminal business, as they provide access to the population’s cash resources. The greater the integration of retail trade into oil companies, the less criminal the situation.

I would like to note here that car owners were most affected by the aforementioned innovations. As well as the increase in petrol prices, they will also have to pay a transport tax. And this amount is quite large. Lorries and coaches owners in Russia will have to pay additionally approximately USD300 million. Speaking about private cars, the tax increase varies from a five-fold increase for Zhiguli owners to almost a 50-fold increase for the owners of the latest Mercedes model.

Clearly further actions for the development of tax reform are necessary: we mean here a reduction in the VAT rate and the single social tax. However, for the time being the government is not ready to support these ideas: consequently there will be a considerable amount of preparatory work. In general my assessment is quite pessimistic: the tax reform has lost its clarity, direction and smoothness and demonstrates an increasingly large number of contradictory impulses.

See also:
Small Business

Moskovskiye Novosti, June 10, 2002

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