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. Last Updated: 07/27/2016

Kremlin Hints 13% Flat Income Tax Is a Ruse

The government's motivation for introducing the 13 percent flat income tax was put into question over the weekend after Deputy Prime Minister Ilya Klebanov said Friday that the tax will increase just after corporations stop hiding their true incomes.

The new tax was introduced last month in a package of four new taxes, which also included a drop in the social tax, increase in taxes on alcohol, tobacco and fuel and amendments to value-added taxes. The new tax is to come into force at the beginning of next year when current income tax rates of between 12 percent and 30 percent will be abolished.

Fears have been expressed that the lower rates are merely a means to draw taxpayers to declare incomes they have previously hidden. These fears were fostered by Klebanov's comments.

Kommersant reported Klebanov as saying Friday at a news conference that the 13 percent tax is a "temporary measure," and after enterprises reveal the true incomes of their staff, a big progressive income tax will be introduced.

Tax Minister Gennady Bukayev said earlier that the new flat 13 percent income tax would attract an extra 10 billion rubles ($359 million) to the state budget. In 1999, only 19.4 billion rubles, or 3.83 percent of all taxes, were collected as income tax, while the biggest portion of tax revenues f 43.4 percent f came from value-added taxes, the Audit Chamber reported.

Kommersant said Saturday the office of Economic Development and Trade Minister German Gref had confirmed that the new tax was planned to stay at the 13 percent level "no later than 2004."

Denis Rodionov, an analyst with Brunswick Warburg brokerage, said Monday: "In no official documents is a duration given for the new tax."

However, Gref said in an interview on NTV's "Itogi" program Sunday that a tax hike may take place "in the long-term future," in eight years to 10 years, by which time the nation will have improved.

Gref said the government values "mutual trust" between it and society and insisted the "current government" has no plan to raise the tax.

He added that he asked his office staff about the comments printed in Kommersant, and no one admitted speaking to the newspaper.

Klebanov was not available for comment Monday, but several top officials hastened to deny that any changes in the income tax are going to happen, at least in the next three years.

Deputy Tax Minister Dmitry Chernik said in remarks reported by Interfax that there is no reason to believe the 13 percent flat tax is a temporary measure, adding that the ministry is preparing materials for its regional branches that will collect the new taxes.

Chernik said that in his opinion, any tax rate must function for at least two to three years.

Interfax reported Deputy Prime Minister Viktor Khristenko as saying the new income tax rate will not be reviewed in the next three years. He added that by dropping the tax, the government wanted to increase revenues to the state coffers, not to uncover the true taxation base.

"I believe that on the level of ideas, increasing taxes has always existed in the government," Brunswick Warburg's Rodionov said.

He doubted that the low income-tax rate will increase tax collection much.

"No one knows what to expect from the government," Rodionov said.

Kseniya Yudayeva, an analyst with the Russian European Center for Economic Policy, agreed. "We can trust the current government when they say they will not change the rate, but can we trust the government at all? They change too often," she said.

Sergei Prudnik, an economist with Troika Dialog, said, "I don't think the rate will be increased even if the tax collection drops.

"I think the state will concentrate on the increase in tax collection f it will put people in jail, or somehow talk them into paying taxes f there is just no reason to raise them if people don't pay small taxes," he said.