Posted on 04/07/2002 12:57:08 PM PDT by stiga bey
President Vladimir Putin got a thumbs-up from operators and analysts of small- and medium-size businesses for the unprecedented tax relief package he announced for the sector in late March.
The radical proposals, hailed as revolutionary in their scope and implications, would fix a flat tax rate of 20 percent on annual profits or 8 percent on gross turnover for businesses with up to 20 employees or 10 million rubles (about $320,000) in yearly revenue. Putin said the proposals would be submitted this month to the State Duma, the lower house of parliament. If approved, the new tax system could go into effect as early as 2003.
The scheme would replace several taxes and fees now imposed on small- and medium-size enterprises, or SMEs. These include the 20 percent value-added tax, or VAT, as well as the 5 percent sales tax and lesser taxes on property and payrolls.
In total, taxes and regulatory fees eat up more than 50 percent of a typical SME’s operating capital each year, experts say. The unsurprising result is that many businesses operate in the gray economy, hiding at least some of their transactions and financial data from tax authorities.
Many heads of SMEs have long complained their tax burdens are excessive. While they praised Putin for his recently announced initiatives, some were apprehensive about what form the new system will take once implemented.
"The fact that the government is taking these concrete measures to reduce the tax burden, and creating a business-friendly atmosphere for SMEs, is a positive step in the right direction," said Veniamin Kaganov, director of the Institute of Business and Investment, which provides consulting services to such enterprises.
Likewise, Putin’s tax overhaul aims to end SMEs’ practice of concealing real revenues and employee wages in order to pay little or no tax. Also, tedious accounting procedures would be eased, as the proposals envision quarterly tax filings instead of the current monthly practice, Deputy Finance Minister Sergei Shatalov told a news conference after Putin’s announcement.
Some experts were more cautious in their outlook on the president’s proposed tax regimen.
"From what I have heard so far, I think the proposals will have a positive impact on SMEs, though a lot will depend on how they are written into law and the subsequent implementation," said Bryan Nielsen, program coordinator for the Russia Small Business Fund of the European Bank for Reconstruction and Development.
If they are enacted, Nielsen said, the new taxes should be implemented uniformly across Russia and not be subjected to arbitrary changes by federal or regional authorities. Such consistency would give businesses faith in the system and allow them to plan effectively.
"The issue of consistency is quite important, because after the State Council [meeting] in December, where a lot of measures were proposed to help SMEs, taxes in the sector have doubled or even tripled in some regions," Nielsen said. "This type of change is possible because the regional governments have leeway on tax issues in their districts."
"Of course, these proposals are in the right direction," said Alexander Fedyayev, owner of Chicken Food, a Moscow-based company that runs fast-food restaurants – each one an SME – since 1998. "However, I would like to add that SME operators need to really analyze these proposals, especially from the point of view of what they stand to gain or lose. It’s only after this analysis that we can praise the authority for these initiatives."
So far, efforts to ease4 the tax burden on SMEs have had a negative effect, Fedyayev said. As an example, he noted that the VAT is based on a business’s gross revenue, not on profits.
"[Putin’s] tax relief strategy for SMEs is good, and we will definitely be happy if it is actually enacted into law," said Yevgeny Zhdanov, co-owner of RVK, a photocopying-equipment vendor.
But, he said, apart from the 13 percent flat tax on individual Russians’ income that took effect this year, there has been nothing concrete to back up the state’s promises to help out SMEs.
"If the government had really embarked on cardinal reduction of the tax burden, instead of the superficial changes made so far," Zhdanov said, "SMEs would have been able to develop much faster without recourse to bank credit, since they would have reinvested these taxable revenues into expansion programs."
Not everything in the Putin proposals has drawn positive feedback from SME chiefs, however. Some have questioned the criteria used in fixing the benchmark percentages. These arbitrarily fixed figures, they argue, would milk their enterprises even more than the cumulative burden of taxes and fees now imposed.
According to Russian legislation, an SME is a private business venture with a maximum of 50 employees that does not have more than 25 percent of its charter capital belonging to a public organization or another economic structure.
"It would have been better if [Putin’s proposal] had stuck to 50 employees as stated in the [current] legislation and a 5 percent flat rate on annual turnover, instead of 20 employees and an 8 percent flat rate arbitrarily fixed as the benchmarks in the proposal," said Kaganov, of the Institute of Business and Investment.
But the government’s logic in fixing these limits is also understandable, he added, as it apparently cannot afford to grant tax relief to such a large number of companies.
"However, these measures ought to be based on well-thought-out economic principles rather than this declarative approach to have the desired impact on the SME sector," he said. "At this moment, I don’t think such a deep economic analysis has been carried out and, if this is not done, these measures might harm rather than help the sector."
Meanwhile, SME owners say the heavy tax burden is just one of many headaches.
They say other measures are also needed to boost the sector, such as eliminating or simplifying the registration process for SMEs, limiting the opportunities for bureaucrats to demand bribes to get things done, reduction the number of agencies that inspect businesses and speeding up bank reforms so that credit is easier to come by.
The government is expected to formally present Putin’s proposals in legislation to the Duma this month. Considering that the already-pro- Kremlin chamber has gotten even more so with recent moves to strip Communists of committee chairmanships, prospects for the new SME tax regimen is all but assured swift passage.
The Russians stole the BOMB from us.
They definitely beat us into space.
I salute them for stealing our flat tax idea and putting it to good use.
I'm sure former Soviet emmigrants might be contemplating a move back to the old country now that economic as well as political freedom have took root.
I've been saying that the only kind of campaign finance reform that will work is a flat tax. You have to reduce the amount of influence that the government can peddle if you want to reduce corruption. Call it "supply-side" campaign finance reform, if you will. If McCain was halfway intelligent and honest, he would have been beating Steve Forbes' drum.
Russia is on it's way to being a less corrupt and more transparent country than the USA. Sigh.
I was thinking more about recent immigrants within the past decade or two.....and only if they could not cope with the complexity of American society.
The fact that you are a member of this forum places you in the top 1% of politically astute Americans.
But for some reason, when I tell that to the other 99%, they don't buy it.
It is one of history's astonishing ironies that Marxism lives on in the DNC and the American media, while it has been utterly rejected in Russia.
I am adamant in explaining this to my friends.
Who would ever think that Russia would be friendlier to business in such a short time?
There is less here than meets the eye,
The major businesses(greater then 20 employees) make up 89% of the business done, and pay 30 - 35% in profits taxes,a broad ranging VAT, as well as excises on specific products.
The story above appears to be an echo of a similar one from the St Petersburg Times, which lays out the same information but indicates some resistance in the Duma for some of the provisions regarding Social taxes. Seems some want to put the Social taxes on the business alone and leave elevated rates.
See a description of Putin's proposal in St Petersburg Times
http://www.sptimesrussia.com/archive/times/757/top/t_6098.htm
As well as what the Russian Tax system currently looks like as a whole, to get a feel for the actual impact of the changes, if any, enacted.
The Russian system appears to be a European style VAT on steriods. The changes to the system have not modified the VAT rate nor its Structure, and in fact expanded the number products which are subject to their VAT to include medications and other previously exempt items.
The Russian politicians appear to have an even better shell game than our politicians do.
The Tax Gap
First it was the "Bomber Gap". Then the "Missile Gap". Then the space race.
Now there is a new gap and the Russians are undoubtedly ahead of us. And this time, the outcome could really determine which country leads the world. What’s worse, our government isn’t even in the race.
In January, 2001, Russia took a giant leap forward by enacting a 13% flat tax. While this was certainly more significant than the launch of Sputnik, it got little attention in the US press and virtually no attention from our government. Most Americans have not even heard that Russia has taken the lead in this vital area.
The flat tax has been, as any decent economist would have predicted, wildly successful. The Russian economy has grown by leaps and bounds. This has caused the government’s tax revenues to skyrocket by 28%.
Not content to sit on their laurels, the Russian President, Vladimir Putin, has announced plans to cut taxes for small business – the driving force behind any modern economy. In addition to cutting their tax rate, Putin intends to roll back the tax-related regulations that are hamstringing small businesses in Russia.
In the meantime, here in the US, state governments are busily enacting more taxes on things like candy, garden seeds, and yarn. The Democrats in Congress are demagoguing targeted tax cuts, saying that they will come out of the entirely fictional Social Security Trust Fund. When will our politicians ever learn that lowering the tax rate increases tax revenues?
The bomber gap and the missile gap didn’t really exist. The space race was a public relations gimmick. But the tax gap is of real importance because taxes act as a drag on the economy. The economy with the lowest drag will grow faster than those burdened by higher taxes. This is a race we cannot afford to lose if we would maintain our primacy in world affairs.
So what can we do to beat the Russians in the all-important contest? We could adopt a flat tax like they have, and our economy would soar like their economy has. But why simply imitate the Russians? Why adopt half-measures? The income tax is a tax on earning and work – the very things we need to encourage if we want our economy to grow. We should adopt a tax on spending.
Imagine never having to fill out personal tax forms again. Imagine a country where businesses did not make decisions based sole on tax implications. Imagine a country where all of the brain power and effort that now goes into getting around the tax system were channeled into productive directions. And lastly, imagine a country without the IRS.
Without the chains of an income tax, our economy would skyrocket. The country would prosper as never before. Governmental revenues would go through the stratosphere. And we would be ahead of the Russians.
That’s a race worth winning.
And will be as long as we keep electing socialists like GW Bush.
We'll be socialist. But we won't be a superpower.
What is going on? Please let me know how to log off.
You left out GOP.
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