TRJ

Some small businesses say a new tax scheme has increased corruption.

A new tax law designed to meet international organizations’ demands for a more transparent tax system is facing opposition from small retailers and some Duma deputies who say it is just another way for corrupt officials to squeeze business entrepreneurs.

The so-called imputation tax law, adopted last year and already in effect in some areas, replaces 32 different local and

federal taxes that small businesses were required to pay on a quarterly basis, forcing them to employ highly skilled accountants to handle calculations and bookkeeping.

A final version of the law is due to come into force nationwide as soon as the second part of the Tax Code is adopted, probably in July.

Some State Duma lower house of parliament deputies – about 30 percent of the tax committee – and small retailers oppose the law, saying it does not have the proper mechanisms to prevent fraud against honest businesses. Experts say the law is also opposed by many less-than-honest businesses that operate in cash and wish to avoid paying taxes.

A "framework" for the law was adopted by the Duma in April 1999 in an effort to simplify the taxation system for small- and medium-sized businesses and individual entrepreneurs. It allowed local and regional authorities to set the tax rate, a method some say has been used by corrupt officials to extract bribes from businesses to keep the rate low.

The final version stipulates that rates will be set by federal authorities, but many are worried that power lobby groups will convince the Duma to water down those parts of the final law that are expected to establish fairness.

"By and large, it is obviously better to pay one tax, at least for the reason of employing less accounting staff," said one small businessman who asked that his name not be used. "The problem is that the fiscal structures often set the tax rate so high that entrepreneurs face a dilemma – either go into the shadow economy or just close the business."

The businessman said the problem can be resolved either by setting "tolerable rates" of the imputation tax or by allowing people to choose between paying the 32 taxes as before or accepting the new rate.

TRJ

A tax burden or benefit for small shops?

The original law established a basic rate for the tax at 20 percent of profit for the following categories: food markets, consumer goods markets, retail sales, manufacturing cooperatives, consumer services (barbers, tailors and jewelry shops, etc.) and individual entrepreneurs. The law does not cover large enterprises, craftsmen’s shops and scrap dealers.

After the framework law was adopted on the federal level, regional legislatures were to consider it and elaborate and adopt specific laws for respective territories. Each region, territory or republic was to determine the so-called "correction coefficient" that would either increase or reduce the basic rate to account for the non-uniformity of economic development throughout Russia.

Moscow, St. Petersburg, Leningrad Oblast, Novgorod Oblast and Samara Oblast pioneered in introducing the law in their domains.

The law caused a tidal wave of protests from entrepreneurs and small industries in a number of regions. "There were protest rallies in the Kaluga Oblast, Vladimir Oblast and Khabarovsk territory, where local entrepreneurs protested against the excessively high rates of the tax," Tax Ministry spokesman Yury Podporin said.

The practice of setting extremely high rates for the tax has produced a "pernicious effect on the development of small businesses" in Russia, State Duma Deputy Ivan Grachev said. It sometimes led to a 10-fold rise in the taxation burden, he added.

"The system of ‘correction coefficients’ to the basic rate of imputation tax benefited those enterprises that could, for a bribe, obtain a favorable rate for themselves, sometimes 50-70 percent less than they paid before. Smaller enterprises and individual entrepreneurs, which could not afford to bribe a tax inspector, were obliged to pay more," Grachev said.

The owner of several kiosks in Moscow’s Sokolniki market said the practice could drive him out of business. "They [fiscal inspectors] assessed my revenues much higher than I have ever earned in my whole life. Now I’m facing a dilemma – either to look for a new location for my business or to grease the palms of the tax inspector," said Andrei, who did not want his family name used.

The Tax Ministry’s Podporin added: "Imputation tax rates for 1999 were determined from the 1998 financial results; however inflation was not taken into account. This is why in many cases the tax turned out to be excessively high.

"The Tax Ministry will continue to insist on a mandatory introduction of the imputation tax ... because it will effectively help to place under taxation those who operate with huge amounts of cash and cannot otherwise be taxed."

In some areas, implementation of the tax has been greeted positively. "We were among the first to introduce the tax in our region," said Nikolai Polyakov, head of the Tax Ministry’s Nizhny Novgorod region. "We started with research into the situation of small- and medium-sized businesses operating in the region and carried out a preparatory campaign in the media."

"We introduced flexible correction coefficients depending on the industry’s location, line of business and turnover. For example, an enterprise located in the center of Nizhny Novgorod and the one operating in a village obviously cannot pay equal taxes even if their lines of business coincide."

As a result, he said, "we have managed to successfully introduce the imputation tax for almost all small businesses in the region. We have information that even those who used to evade taxes have accepted the new system."

Imputation tax is most convenient for enterprises with stable and predictable revenues, while those who are not certain about their proceeds would still prefer to pay 32 taxes on a quarterly basis, officials said.

"Enterprises with seasonal revenue fluctuations now have the opportunity to avoid paying excessive taxes to the budget," a source in the Labor Ministry said.

"Such enterprises include small- and medium-sized wholesalers and food processing factories. The opportunity to pay lower taxes during idle seasons will allow many enterprises located in Russia’s southern areas, where food processing industries are concentrated, to avoid personnel reductions."