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. Last Updated: 07/27/2016

City Spites Luzhkov, Passes 2% Sales Tax

The Moscow City Duma has approved a sales tax of only 2 percent for the city, setting up a confrontation with Moscow Mayor Yury Luzhkov who wanted a 5 percent tax to top up city coffers.

Moscow has dithered for six months over imposing a sales tax because of fears it would be unpopular. Regions were allowed to levy a sales tax of up to 5 percent by a federal law passed in July last year, and many quickly did so. For example, St. Petersburg implemented the tax on Jan. 1.

But Luzhkov delayed proposing the tax and was only forced to ask the City Duma, the local legislature, to approve a 5 percent tax after the city's revenues crashed late last year. Duma deputies and city officials agree he is likely to veto the bill and press for the full 5 percent.

The federal law exempts a long list of items from the sales tax, including bread, milk, vegetable oil, sugar, salt, potatoes, baby food, medications, children's clothing, utilities, real estate transactions, public transportation tickets, insurance, funeral expenses, services rendered by the government and education fees.

Moscow deputies added even more exemptions - sauerkraut, matches, tea, domestically produced soap and toothpaste, newspapers and magazines, although not if they have too much sex, pornography and advertising. The deputies also added an exemption for tickets for privately operated mass transportation - an addition pushed forward by Oleg Muzyrya, the head of the City Duma budget committee and former president of Avtolain, the largest private minibus company in Moscow.

The exemptions provide a loophole, many experts and deputies said, that would allow entrepreneurs to avoid tax by marking taxable items as tax-exempt.

Using the tax, the city hoped to collect as much as 5.3 billion rubles ($2.24 million), although some estimates went as high as 15 billion rubles this year. Under the city's estimates, the 2 percent tax, if implemented starting from April 1, is expected to bring in only between 2 billion and 2.5 billion rubles. The city's total budget is about 60 billion rubles.

If Luzhkov approves the bill, the tax could be imposed as soon as July 1, though there could be a legal hitch. Under the first part of the new federal tax code that took effect Jan. 1, no new tax can be levied until the next calendar year after it has passed.

The city wants to impose the sales tax to make up for revenue that could be lost due to changes in federal tax laws. Under the 1999 federal budget law, the city will lose some of its share of the revenues from value added tax, profits tax and income tax.

Altogether, about 7.7 billion rubles will be diverted from city coffers as a result of these changes and go instead to the federal budget, said Valery Zharov, the deputy head of the city's economic policy and planning department in a memo the city sent to the City Duma.

The city threatened deputies with further cuts in city spending if they did not pass the 5 percent sales tax. But Mikhail Vyshegorodstev, head of the City Duma's committee on entrepreneurship, said that such threats were off the mark: The revenues from the sales tax are not included in the 1999 Moscow budget. The move to make the tax rate lower was supported in the business community, said Vladimir Shtern, a member of the Russian Association for the Development of Small Business and chairman of the board of directors of the Moscow Leasing Co.

"Still, I don't know any other country in the world that the value-added tax is imposed simultaneously with the sales tax," he said.