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. Last Updated: 07/27/2016

Tax Code Point Man Sees July Approval

Russia's tax reform chief Tuesday promised speedy passage of a new tax code, which slashes rates and improves protection of taxpayers' rights, but the bill is expected to face an uphill battle in the State Duma.

Deputy Finance Minister Mikhail Motorin said in an interview he expects the State Duma to vote on the code in a first reading in early March, paving the way for full approval of the bill by July.

President Boris Yeltsin has ordered the government to reduce taxes to stimulate economic growth. Many consider this year to be the last chance for tax reform before Duma deputies begin gearing up for elections in 1999.

An overhaul of Russia's current tax system is considered crucial to boost investment and strengthen the country's ailing public finances, which have been crippled by widespread tax evasion.

"We hope that the code will be fully passed by the Duma in June, so that the Federation Council and the president can approve it in July," Motorin said. "We will do everything possible to make sure that the code is in effect by Jan. 1, 1999."

A aide to the Duma budget committee said, however, that the timetable was overly optimistic and predicted that the tax code would face the same uphill battle in the legislature as it did last year.

The government Monday sent the Duma a new version of its proposed tax code, which would reduce the overall tax burden on the economy by 60 billion rubles ($10 billion) or 2 percent of Russia's gross domestic product, Motorin said. The reductions are in addition to those foreseen in a new income tax bracket already approved by the Duma, which will reduce taxes by 23 billion rubles this year, he said.

The code is a reworked version of an earlier bill that got bogged down in a political standoff between opposition deputies and Cabinet reformers last year.

The new version slashes the number of taxes and contains deeper tax cuts than the government's original draft. Taxes on company profits would be reduced to 30 percent from 35 percent and value-added tax would remain at 20 percent, with a lower tax rate of 10 percent for certain goods, Motorin said. The code would also reduce payroll taxes as part of the government's effort to discourage employers from hiding wages.

The new proposals reflect a change of leadership at the Finance Ministry, which FirstDeputy Prime Minister Anatoly Chubais lost control of last November. He was replaced by Mikhail Zadornov, a former deputy from the reformist Yabloko faction, who brought in Motorin in December to head up the government's tax reform efforts.

As a Duma deputy, Zadornov had advocated lower tax rates to promote economic growth and legalize Russia's vast shadow economy. He sharply criticized the government's proposals for failing to protect taxpayers' rights and contradicting the Civil Code.

The new version attempts to address these criticisms along with others voiced by Duma deputies last year, raising hopes that it will experience a smoother ride through the legislature.

"It is more realistic this time because the code has been around for a while," said one tax expert who asked not to be named. "Duma deputies feel the government has compromised and they have been met halfway."

The sidelining of Chubais, a reviled figure in the Duma, may also help the code win the approval of deputies. Observers have noted that Zadornov's previous links to the Duma could ease passage of the tax code, but it already faces opposition.

Unlike last year, the government's draft will be competing with at least half a dozen alternative versions which have been submitted by Duma deputies and regions. A special commission consisting of Duma deputies and government representatives is expected to choose the version to be put to a vote by the full chamber in March.

Most of the alternative proposals are not considered realistic, making it likely that the government's code will be the backbone of Russia's future tax system.

The government is planning to base the 1999 budget on the new code, which it hopes to have fully in place by the start of next year.

"In the worst case scenario, we will see a staggered implementation of the code next year," said the tax expert.