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: / Analytics / The Tax System of the Kyrgyz Republic (2003)




Kyrgyzstan Review, 10 years ago




5.2. Russia

In 1992 a tax reform was carried out by Russia for the purposes of adjusting the tax system to the needs of the new market economy. However, the growth rate and radical character of these changes were not strengthened by their quality and political will to support the new system. A new legislation determined but the main economic features of certain taxes without paying attention to important technical details, whereas old tax procedures and tax administration remained unchanged. Adoption of various preferences under the influence of sectoral lobbies resulted in such a grave distortion of taxes that, despite high rates new taxes appeared to be ineffective in fiscal terms bringing very low budget receipts. The share of taxes in GDP fell from 25.9 % in 1993 to 21.7 % in 1998. Shortage of receipts compelled federal, regional and local authorities to look for and invent additional financial sources. This has led to imposition of numerous additional taxes and quasi-taxes, such as local sales tax (duplicating VAT), contributions to the off-budget funds, payments for regulatory and inspection activity of the self-financed government agencies, penalties for non-conformity with the established standards, voluntary contributions to various funds and organizations established on the initiative of regional and local authorities.
 
Having become sophisticated, distorted and non-transparent, the whole tax system stopped performing its main functions.
 
The crisis of 1998 and change of the Government were a starting point for the comprehensive economic reforms program, in which the tax reform was given a priority. In July 2000 the Duma approved the changes in the legislation related to income tax, contributions to the Social Fund, VAT and excise taxes, which became effective since January 1, 2001. In summer 2001 the program of the radical reform of profits tax and taxation of natural resources was developed and came into force in 2002.
 
The following principal changes have been made:
 
¨ The unified 13% rate of income tax was fixed, which replaced the progressive three-level scale of tax rates (12, 20 and 30%). The possibility of deductions was decreased, but the possibility of deducting certain fixed amounts connected with the social and family status, housing investments, education and health care from taxable income was preserved.
¨ Contributions to the Pension Fund, Social and Medical Insurance Funds and the Employment Fund were united into the united social tax with the regressive scale.
¨ The rate of profits tax was decreased from 35% to 24%, and tax preferences and tax holidays (mainly at the local level) were revoked.
¨ Excise tax rates on oil products and alcohol goods were increased, and the taxable base of income tax was extended at the expense of imposition of this tax on diesel fuel and mazut.
¨ VAT revenues were consolidated in the federal budget, some privileges on VAT were revoked; the destination principle of VAT and excise taxes in trade with the CIS countries was adopted (except for energy sector).
¨ The rate of road tax was decreased from 2.5% to 1% of gross income, and certain insignificant taxes were revoked.
¨ Tax on restoration of mineral resources, excise taxes on mineral products and tax on extraction of subsoil mineral resources were united into the united tax on mineral resources with the rate on ad valorem basis.
 
The list of the rights and obligations of a taxpayer was formulated in the Tax Code; the role of fiscal bodies was exactly defined, which deprived the latter of their rights to charge penalties. These powers were transferred to courts. To make tax administration more effective, a part of the Ministry of Finance, the Tax and Customs Inspectorates were united into one structure the Ministry on Taxes and Collections.
 
As a result of the changes performed, receipts of income tax in 2001 have grown almost by half in real terms. It should be taken into account, that in 2000 almost 90% of taxpayers paid income tax at the minimal rate (12%), that is why increase of the rate for them by 1 percentage point resulted in growth of income tax receipts by 0.1% of GDP. According to the estimates of the Institute of Economy in Transition, decrease of the marginal rate for taxpayers, who were paying tax at higher marginal rates in 2000, led to decrease of receipts by 0.05 % of GDP. About 0.2% of GDP of income tax receipts growth took place in 2001 due to expansion of the tax base.
 
VAT proceeds grew in real terms by 43% against 2000. At the same time it should be noted that VAT refunds in 2001 grew by 0.9 % of GDP (from 1.4% of GDP to 2.5% of GDP) which in its turn produced a negative effect on the level of VAT proceeds, but reflected improvement in the work of the tax administration bodies.
 
Excise tax receipts significantly grew their growth in real terms amounted to 48%. According to the estimates of the Institute of Economy in Transition, the new measures resulted in increase of excise tax receipts in 2001 against 2000 by more than 0.25 % of GDP.
 
Receipts of social tax in real terms grew in 2001 by 10% against 2000, but decreased by 1.3 % of GDP. It should be taken into account that about 7% of receipts were from repayment of debt on deductions to the social budget funds, which occurred before 2001.
 
Profits tax receipts grew in real terms by 32% in 2001. However, it is prematurely to analyze the effects of profits tax rates reduction, as they started being applied only from the beginning of 2002.
 
The first results of the changes performed in Russia in the system of taxation are undoubtedly positive. The reform was a success due to its good preparation on the one hand, and due to resoluteness of the power bodies to introduce the new system, on the other hand. Formulating recommendations for Kyrgyzstan, it is necessary to remember, that the Russian reforms were put forward by the new President, who has managed to create a new image of the central power, the power, which wills and can introduce proper order in the country. Of significant importance was the fact of fiscal risk insurance, connected with the tax reform. Preliminary expenditures connected with carrying on the changes were assessed as 1.7% of GDP in 2001 and 0.5% in 2002. In case of greater decrease of the budget revenue, the Government preserved the possibility of increasing the rates of export duty for oil and oil products.