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Russia: Tax Reforms Face Uphill Battle In Duma

Moscow, 28 May 1997 (RFE/RL) -- The Russian government is gearing up for a battle with the State Duma over plans to reform the nation's monstrous tax system, which has been blamed for everything from wage arrears to stifling economic growth.

After several years of toying with reforms, the government finally sent the final three sections of the draft tax code to the State Duma last month, fulfilling a key condition for the International Monetary Fund to resume lending to Russia.

The whopping 400-page package of reforms is the pet project of Deputy Finance Minister Sergei Shatalov, who has been urging deputies to put it at the top of their list of priorities.

Despite vows by the government to get a new tax system in place by the start of next year, many observers predict both houses of parliament will put up a fight and delay passage of the code until next year. While there is a growing consensus on the need for reforms to end the crippling wage and pension arrears crisis, aspects of the government's proposals are unlikely to be swallowed easily by Russian legislators.

The proposed reforms would drastically simplify the current system, which was passed in 1992 and has mushroomed into an unwieldy patchwork of local and regional taxes, many of which cost the government more to administer than they actually earn.

The code would reduce the number of taxes from around 200 now to 30, ease the overall tax burden and introduce measures favorable to businesses, many of whom claim that their profits turn into losses due to Russia's burdensome taxes.

But reducing the tax burden also means squeezing government revenues. Shatalov says the new code would reduce budget revenues by 73 trillion rubles ($12.7 billion), but that it would make up for some of the projected losses by closing loopholes and bringing more people into the tax system.

Nevertheless, revenues will fall. He has pledged that the government will keep the budget deficit in line by slashing spending.

For the opposition-dominated Duma, the proposed reforms represent an important bargaining chip in the Duma's battles with the reformist Cabinet over spending cuts. Deputies are likely to balk at a tax code that will almost certainly take a bite out of social spending. With the government keen to get the tax reform legislation passed, it may be forced to compromise on other fronts.

But the toughest fight may be in the upper house of parliament, the Federation Council. The government's proposals not only attack the revenue raising powers of regional governments, but they also affect the ability of the federal center to redistribute revenues among poorer and richer regions.

The code would ban regional governments from lowering profit taxes to attract investment, setting a unified rate of 35 percent. At present, many regions offer reduced rates to lure investors.

At the same time, the government is proposing to change the way tax revenues are divided between the center and the regions. If the government gets its way, all revenues from value added taxes -- a relatively easy and lucrative levy to collect -- would go to the federal budget, unlike the current system which gives a portion of those funds to the regions.

Under the government's proposals, all revenues from profit taxes would go to the regions where they are collected instead of being shared with the center. Given widespread tax evasion and the low profit rates of many enterprises in Russia's fledgling market economy, regional governments are unlikely to welcome being saddled with an unprofitable tax that is difficult to collect.

Analysts say that the government, anticipating a recalcitrant Federation Council, has proposed allowing regional governments to impose a retail sales tax of up to 5 percent on top of VAT, thereby giving them a way to raise easy revenues if need be.

However, Communist deputies in the Duma are expected to oppose attempts to raise additional taxes on consumption, saying such moves will raise prices and harm the poor.

Given the array of obstacles, many observers predict the new tax code will not be passed before 1999. First Deputy Prime Minister and Finance Minister Anatoly Chubais today urged the Duma to pass the bill in its first reading before its summer recess. However, the chamber's Budget Committee has yet to even begin considering the proposals.

One of the government's main fears is that the Duma will try to make so many changes to the tax code that it will be an unworkable piece of legislation.

"I once described the Duma as a black box. You hand in one thing and a totally different product comes out," says Shatalov

However, Shatalov vowed to push the tax code through the Duma with what he called "minimal compromises" so that it could come into effect by the start of 1998.

But doubts still linger. The head of the State Tax Service, Alexander Pochinok, told the Russian daily Izvestia on Saturday that he personally believed the tax code would be passed only by the end 1998.

"As the head of the tax service, I will move heaven and earth to get it passed this year," he said.