New Tax Code Approved by Ministers

The Russian government Thursday approved in principle the main provisions of a broad new tax code and resolved that it should be fully in place for the start of next year.


"The sooner, the better," Prime Minister Viktor Chernomyrdin told ministers during a four-hour debate, adding that the government could "no longer rely on piecemeal steps," Interfax reported.


But it will be at least another month before the document will be submitted in full to the State Duma, with questions over taxation of currently exempt soldiers and a value-added tax on trade with the Commonwealth of Independent States still unresolved.


The long-delayed new code would slash the number of taxes in Russia to 30 from more than 150, eliminate some $12 billion worth of tax exemptions, ease the corporate tax burden and broaden the base of eligible payers.


"We hope very much that the passage of the tax code will establish a tax regime at least for several years, a more liberal and beneficial regime," Deputy Finance Minister Sergei Shatalov told reporters after the cabinet meeting.


Shatalov offered some words of encouragement to foreign investors pushing for the speedy adoption of provisions on tax case appeals and deductibility of business expenses.


"We are considering measures to provide important guarantees for investments and we expect the tax code to resolve many problems now facing foreign investors," he said. Although the full code is not to be enacted before 1998, some provisions might take effect before that date, according to Shatalov.


But the measures being pushed by the foreign business lobby could get bogged down during full parliamentary debate on the four-part code. The first part, submitted to the Duma last year, is due for consideration in March, with the second, third and fourth parts to be submitted as one document within a month, Shatalov said.


"If they can pull it off, that's fine. But it's looking like they may not be able to do it," one Western economist said prior to Thursday's announcement. "So maybe they should be thinking about doing it incrementally."


Shatalov said revenue projections under the new code would be used to draw up the 1998 federal budget, noting that the government would bring in 20 trillion rubles less under the proposed tax code than the current system forecasts. Revenue as a proportion of gross domestic product would fall from 36 percent to 35 percent.


The need to adopt economic and structural reforms through liberalizing the tax system justifies the money that would be lost, Shatalov said. But if a stronger economy next year does not compensate for the lost revenue, spending would have to be cut, he said.


Chernomyrdin told the government meeting that he will turn a deaf ear to anyone who would lobby for tax concessions, Interfax reported. But he said no decisions on taxing soldiers' pay would be taken without consulting the defense ministries.


Shatalov suggested that taxes for servicemen could be phased in over several years.