Tax Reform In Russia

Achieving a stable system of taxation was desired by all in Russia. Starting from tax administrators as well as tax payers everyone was yearning for a taxation system, which would be fair and transparent. It was realized that this can be achieved provided the Russian government puts in all efforts to introduce tax reform in Russia.

Prelude to tax reform in Russia:

The tax system in Russia required a thorough revamping because the economic condition of former USSR was in doldrums after the disintegration of USSR. The citizens of the nation were already agitated due to the instability. Majority of them had to forgo their pensions and wages. The economic state of Russia was such that the creditors, who had assisted the government with financial help declined to extend any more financial help if the government in Russia did not implement tax reform. It seemed that tax reform in Russia was a resort, the Russian government could fall back up on. Tax reform in Russia required careful handling of tax issues because inflation had also taken over.

The foundation was laid:

The foundation for a tax reform in Russia was laid in the year 1991. The government in Russia, framed a set of tax laws. These set of tax laws were formulated with a hope that they would render support to the various economic reforms in the country and also help in establishing a market economy. Once the laws were passed, the tax administrators appended amendments pertaining to tax legislation. But, frequent changes laid to tremendous confusion and there was hardly any instance when uniformity was maintained in tax laws. Due to frequent modifications the tax payees had to shell out extra money in form of penalties. This happened due to the fact that unless the tax administrators were not well versed with the tax norms, they would not be able to convey correct information pertaining to the same. This caused disharmony among countrymen. So, to nullify the ill effects, the new Tax Code was introduced.

New Tax Code (1995-1997):

Tax reform in Russia was also affected by the implementation of the new tax code in Russia.The new Tax code was drafted during the period 1995 to 1996 and the first half of 1997. The tax code had the essential features of taxation system followed in all OECD (organization for economic cooperation and development) nations in addition to some features already existing in the taxation system in Russia. But, this new tax code too had few drawbacks as it failed to take off the burden of tax from the people of Russia. Moreover it was felt that such a system would eventually act as a hindrance in the implementation of economic reforms in the country. As many as 4000 amendments were made and this required careful assessment of each. This was very impracticable because it was time consuming and the government had to attend to budget preparation towards the end of the year.

Budget was the center of attraction:

The ministers got down to work over the budget. The Russian President intended to withdraw the budget but was opposed by few other ministers who wanted the new tax code to be re assessed and re considered. The then deputy Chairman Mikhail Motorin took the initiative to workout a new draft tax code. It was reckoned that the draft tax code would make tax rules much simpler, which could be easily understood by the common people. It was expected that the new draft tax code would attend to various lacunae and drawbacks prevailing in the taxation system of Russia through decrease in the number of types of taxes and decrease in tax rates.

Draft tax code by Mikhail Motorin:

The draft tax code underwent several reformations, addenda and deletions in successive years. The draft tax code has several parts, each part dealing with a particular topic pertaining to tax system in Russia.

Objectives of draft tax code:

The main objectives of the draft tax code were the following:

• Guide the tax payers
• Guide tax administrators
• Reduce tax burden on corporations
• Review list of exclusions
• Enhance revenues
• Fair as well as even distribution of tax burden on people
• Reduction in Federal taxes (number)
• Lowering the upper limit of tax rate pertaining to profit from 35 percent to 30 percent

The draft tax code also aimed at shifting tax burden to the individuals from the companies. This was done with a view that it would in turn help the business firms to save more. During this period, tax on promissory notes referred to as “vekseli†was introduced by the Russian government. During the same period, forfait tax system 1 was also enacted. This was a tax norm pertaining to small business firms.

Accounting procedures:

Tax reform in Russia also necessitated the adoption of new and latest procedures for the tax calculation in the country. One main drawback of the tax calculation system was that the process followed in the calculation of tax centered around physical productivity of goods instead of concentrating on the tax base.

Changes brought about in other spheres of taxation:

Tax reform in Russia comprised reform in value added tax or VAT. Reform led to the expansion of the tax base brought about by cancellation of 10 percent reduced rate. This change was effected keeping in mind certain types of goods, which included food products and clothes for children.

TIN or Taxpayer Identification Number:

Automated collection of taxes was on the agenda and this necessitated the implementation of the TIN or taxpayer identification number. The TIN could also be used for several other purposes, which would hasten the process of tax collection.

Transition period:

After the introduction of the draft tax code, several changes were made in it and this gave rise to several editions of the tax code. As the country was facing socio economic and political crisis, increase in revenue generation was very much the need of the hour. All efforts were directed towards generating as much tax revenue as possible.

Russian tax code -one step ahead in tax reform in Russia:

The government in Russia adopted the Russian tax code. The economic reform propounded by President Boris Yeltsin paved way for tax reform in Russia, which was in tune with the requirements of the conditions of the Russian market. However, tax reform in Russia did not take place overnight. People along with the government at different point of time had to toil for years to attain this position.

Russia flat tax rate:

As a step further in tax reform in Russia, the country adopted the flat tax rate in Russia on January 1st in the year 2001. This measure was proposed by Vladimir Putin. As a result of introduction of the flat tax rate in Russia, there were improvements in all quarters.

Benefits of flat tax rate:

• Inflation was taken care of
• People started gaining faith in the government because this system proved to be fair and transparent
• More and more tax payers started paying taxes
• There was substantial increase in tax revenues