Economy Ministry Urges 12% VAT

The Economic Development and Trade Ministry has proposed to cut the value-added tax to 12 percent to 13 percent from the current 18 percent from 2009 as a measure to boost growth in nonenergy sectors of the economy.

The proposal comes after both outgoing President Vladimir Putin and President-elect Dmitry Medvedev took the side of the industrial lobby in a tax debate that dragged on for years despite strong opposition from Finance Minister Alexei Kudrin.

"The main positive effect [of the tax cut] will be the change of the quality of economic growth -- investment will go to sectors with high added value," the ministry said Sunday in a letter to Kudrin, who oversees the country's economic policy.

The VAT brings in about one-third of the country's budget revenues, and Kudrin argues that the cut would badly affect the budget. Critics say the tax is difficult to collect because of bureaucracy and that some of the record budget surplus can be used to support growth.

The letter comes amid a chorus of tax break proposals, which include an idea from the financial markets watchdog to scrap taxes on securities transactions, as well as proposals by state oil major Rosneft to ease the tax burden on the oil sector to spur development of new fields.

The letter also proposes abolishing a preferential 10 percent VAT for socially important goods, such as food staples, and increasing export and excise duties on heavy oil products to encourage production of lighter products, such as gasoline and diesel.

The ministry said the measures would boost economic growth by 0.6 to 0.7 percentage points within two years and cut budget revenues by 1 percent of the gross domestic product.

It also said a lower VAT rate would help curb a widespread use of tax-evasion schemes.

Other measures include tax breaks for research and development expenses, voluntary medical insurance, corporate contributions to voluntary pension schemes and interest payment on mortgages.

The letter also suggests scrapping a 24 percent corporate profit tax for transactions involving stakes of over 10 percent in Russian firms as well as their dividends, to encourage firms with offshore ownership to make such deals in the country.

Russia enjoyed a record economic growth of 8.1 percent in 2007 despite a stagnant oil industry, whose lobbyists complain about an excessive tax burden.

Some economists and officials, including the Central Bank's monetary policy chief, Alexei Ulyukayev, see signs of overheating.

Kudrin has managed to successfully defend the budget and the oil fund, where the country has piled up its windfall revenues for years, but yielded to pressure last year ahead of the parliamentary and presidential elections, agreeing to raise pensions and wages.

The pressure on Kudrin, seen by many investors as the architect of the country's macroeconomic stability, has intensified further in recent weeks.