Small business hails Putin ... [now a corporate flat tax in Russia]

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."

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.

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Hope this helps.

Yeah, whoda thunk the Russian Federated Republic would be the great testing ground for Malcolm Forbes' exact tax prescription?

I firmly believe that there will soon be the greatest wave of unprecedented prosperity in that long suffering nation, since the short lived free economic reforms of the New Economic Plan of the early 1920's.

Too bad the DNC and the U.S. media will obviously do everything in their power to hide all this from the American people. Probably say it shows the resiliance of communism!

Well, you all didn't do anything. 13% flat tax was the standard under the Tsar, who had progressive tax reforms. The Soviet system was imported first into Russia by Western Intellectuals who cause the revolution and once the nuts and bolts were worked out it was brought back home to W. Europe and America.

Maybe with a few more changes, the tens of billions of dollars that have been taken out of Russia will be reinvested so that Russia can give the IMF and the WB the finger.

VRN

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