The history of taxation in Russia

Throughout the first half of the 1990s, international financial institutions warned Russia that major adjustments were needed in the structure and the administration of the country's tax-collection system. However, in 1996 few meaningful changes had emerged. Tax reforms until that time had emphasized revenue from income, consumption, and trade, with the value-added tax (VAT), corporate profit taxes, and personal income taxes accounting for 60 to 70 percent of total revenue. Beginning in 1993, experts have pointed to changes in the bases and rates of the profit tax and the VAT as a major cause of declining revenues. Between 1993 and 1994, the ratio of taxes collected to GDP declined from 41 percent to 36 percent, although the percentage of GDP paid in taxes already was lower in Russia than in any of the Western market economies. In the first quarter of 1996, only 56 percent of planned tax revenue was realized.

The system in place taxed the profits of enterprises heavily, especially in comparison with the tax burden of personal income in 1996. In 1993 business profit taxes were three to seven times higher than in Western economies, and personal income taxes were two to four times lower. That emphasis was not conducive to expanding investment, and many non-wage sources of income were not captured by personal income tax standards. The Russians kept from US $30 billion to US $60 billion in foreign banks to avoid taxation.

The VAT in Russia, which is levied on imported and domestic goods, is set at 18 percent for most purchases and 10 percent for a specified list of goods. Administration of that tax is complicated by uneven compliance and accounting rules that do not define clearly the amounts to be classified as value added. Taxation on the extraction and sale of natural resources is a major revenue source, but the current system yields disproportionately little revenue from the energy sector, especially the natural gas industry. Excise taxes are levied on merchandise of both domestic and foreign origin. The tax on imported luxury items ranges from 10 to 400 percent, and the rate on imports has been kept higher than for domestic products in order to protect domestic industries.

Taxes on trade are a major revenue source. In the mid-1990s, export taxes became a more important source of revenue than other types. Frequent changes in the tariff schedule for imported goods have led to confusion among importers. The average tariff rate in mid-1995 was 17 percent, but a reduction of maximum rates was announced for the medium term.

Russia's taxation agency is the State Taxation Service (STS), which was established to administer the new market-based tax system installed in 1991 and 1992. Although in the mid-1990s its staff of 162,000 employees was much larger than tax agencies in Western countries, the STS has been hampered by poor organization, inadequate automation, and an untrained staff. Training and reorganization programs were announced in 1995, and some streamlining has resulted in separating the roles of various levels of government, identification of tax-eligible individuals and corporations, and application of penalties for tax evasion and tax arrears.

Experts have identified the most serious defect of the tax administration system as the ad hoc granting of tax exemptions, which distorts the overall revenue system and undermines the authority of administrators. The most problematic examples of this practice are exemptions granted to agricultural producers and the oil and natural gas industries.

 

Exercise 2.

In the text, find the answers to the following questions.

1. What was Russia warned about?

2. What happened in 1996?

3. What can you say about tax reforms until that time?

4. What changes were there in 1993?

5. What happened to the ratio of taxes from 1993 to 1994?

6. What can you say about the state of GDP in Russia at that time?

7. How much tax revenue was realized in 1996?

8. What can you say about profit taxes and personal income taxes in 1993?

9.  What about the VAT? How is it charged?

10.  How is VAT administered?

11.  What is a major revenue source?

12.  What are excise taxes levied on?

13. Why has the rate on imports been kept higher than for domestic products?

14.  What can you say about taxes on trade in the mid-1990s?

15.  Why was Russia's taxation agency established? When?

16.  What are the drawbacks of the tax administration system?

17.  What can you say about the current system of tax administration?

What has been changed?

Exercise 3. Find a word in the text that matches each definition below. The words appear in order.

1. Serious, important, or useful in some way                  ______________

2. (three words) The amount of revenue remaining from a corporate enterprise after all expenses—including labor, materials, etc.     ______________

3. (three words) A direct tax on an individual's income. ______________

4. (two words) Gross revenue.                                  ______________

5. (two words) An economy in which a substantial proportion of economic decisions is taken by the use of markets.                      ______________

6. The process in which the substance of a thing is completely destroyed, used up, incorporated or transformed into something else. ______________

7.  (two words) A tax on the sale or use of specific products or transactions.

______________

8. (two words) Published list of charges, prices, rates, etc., arranged or organized in a particular order.                                   ______________

9. (two words) Taxes paid above the cost of an exported or imported good from one country to another, and can be impacted by international treaties.

______________

10. (two words) When taxes owed for the previous year are paid in the current year.                                                                        ______________

 

Exercise 4. Sentence completion.