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. Last Updated: 07/27/2016

Court to Regions: Fix Sales Tax Law

The Constitutional Court called on three regional governors Tuesday to change their sales tax laws.

The court did not challenge the legitimacy of the sales tax itself, but it urged lawmakers in the Chelyabinsk, Kirov and Chuvashia regions to rectify irregularities found in their laws.

However, this cannot be done without an adjustment to the obsolete federal law, which is due to be replaced by the second part of the Tax Code, which is still not fully approved by the State Duma.

"The main problem is that sales tax, being a regional tax, is nevertheless regulated by a federal law," says Feliks Eigel, public finance director with EA-Ratings agency.

The outdated 1991 federal law — "On Foundations of the Tax System in Russia" — has been declared unconstitutional by the Constitutional Court, the nation's highest.

Consequently, regional laws that were based on the federal law were also inconsistent with the more recently approved constitutional norms.

Lawmakers in Chelyabinsk, Kirov and Chuvashia were told to take care of inconsistencies, though the Constitutional Court did not mention how exactly that should be done.

In a strictly juridical sense, most of the fault lies on the side of federal authorities, who should have passed a separate law introducing the sales tax and outlined its status.

In particular, they should clarify who exactly should pay the tax and whether it falls into the jurisdiction of the regional governments or municipal governments.

Some provisions of the 1991 law say that sales tax revenues should be split between regional governors and local municipalities, with 40 percent for the former and 60 percent for the latter.

Given that the sales tax substituted 16 local taxes, it appears that the new tax gave part of the local governments' revenues to the regions.

The sales tax made up some 5 percent of the total tax take in the regions last year, according to estimates of the Economic Expert Group.

However, despite a string of irregularities, the Constitutional Court did not rush to scrap the sales tax, leaving the regional authorities 11 months to put its house in order before the next new year.

"Immediate abolition [of the tax] would undercut the fiscal performance [of the regional governments] and thus violate individual rights and freedoms," says the text of the statement issued by the court.

Likewise, the court refused to lower the tax rate, which can not exceed 5 percent according to federal regulations.

"The most likely outcome is that regional authorities will bring their legal paperwork in line with the court's requirements," said Alexander Ustinov, analyst with the Economic Expert Group.

Eigel said that this would automatically happen after the approval of the second part of the Tax Code in full.