Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Cabinet Agrees to Slash Tax Burden


First Deputy Finance Minister Sergei Shatalov

The Cabinet on Wednesday approved sweeping tax cuts for next year equivalent to 1.75 percent of GDP, in large part by lowering the country's value-added tax.

A reduction in VAT from 20 percent to 18 percent, effective Jan. 1, is the centerpiece of the plans proposed by the Finance Ministry to reduce the tax burden on gross domestic product and boost growth.

"The decision, in principle, has been taken," First Deputy Finance Minister Sergei Shatalov, the government's point man on tax reform, was quoted by Reuters as saying after presenting his plan to the government. "My report received general support and the measures were approved."

The Finance Ministry drafted its plan in response to Prime Minister Mikhail Kasyanov's demand that taxes be cut by 2 percent of GDP. The country's 2003 tax burden stands at 30.7 percent of GDP, Finance Ministry data show.

Shatalov said that over the next three years, the VAT cut will spur GDP growth of 0.5 percent to 1 percent, according to the government's web site,

Further tax cuts are planned for 2005, when the government intends to lower the unified social tax, the payroll tax employers pay.

Reconfiguring the payroll tax structure will effectively lower that tax by 5.7 percent, the Finance Ministry calculates, bringing budget losses of 194 billion rubles ($6.2 billion). The tax is the main source of funding for the medical and social welfare systems.

The Finance Ministry hopes to cut taxes again in 2006, rolling back VAT even further, to 16 percent. At the same time, it would do away with the preferential zero percent VAT rate for goods like baby food that are considered socially important and the 10 percent VAT rate for industries like pharmaceuticals and mass media.

Earlier this year, the government decided to scrap the sales tax, effective next year. The tax, now capped at 5 percent, is levied by the regions, and their budgets are expected to lose 60.6 billion rubles ($1.9 million) when the tax disappears.

To compensate for budget revenue losses, some energy-sector taxes will be increased.

Gas export duties will be raised from 5 percent to 20 percent. Also, the basic mineral extraction tax rate for the oil sector will be raised 5 percent to 357 rubles ($11.48) per metric ton from 340 rubles ($10.93) per ton.

Gas excises, meanwhile, were cancelled by the Cabinet on Wednesday.

The loss of tax revenues will impact government spending targets, and ministries have been told to adjust their 2004 budgets accordingly.

Peter Westin, chief economist at Aton brokerage, said the government was behaving responsibly by spacing out the VAT and unified social tax cuts by a year, instead of making rash decisions at a time when the budget is blessed with unprecedentedly high oil revenues. Such patience, he said, will give the government a chance to revise some of its plans in light of the lower oil prices widely seen on the horizon.

"I think it's a pretty good deal," Westin said. "It shows a cautious approach."