Russia's tax reform sees VAT cut to 12-13 pct

MOSCOW, March 16 Sun Mar 16, 2008 5:01pm EDT

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MOSCOW, March 16 (Reuters) - Russia's Economy Ministry has proposed to cut the value-added tax to 12 to 13 percent from the current 18 percent from 2009 as a measure to boost growth in non-energy sectors of the economy, a document showed on Sunday.

The proposal comes after both outgoing President Vladimir Putin and President-elect Dmitry Medvedev took the side of the industrial lobby in a tax debate that dragged on for years despite strong opposition from Finance Minister Alexei Kudrin.

"The main positive effect (of the tax cut) will be the change of the quality of economic growth - investment will go to sectors with high added value," the ministry said in a letter to Kudrin, who oversees Russian economic policies.

The VAT tax brings about one third of Russia's budget revenues and Kudrin argues the cut would badly affect the budget. Critics say the tax is difficult to collect due to bureaucracy while some of Russia's record budget surplus can be used to support growth.

The letter comes amid a chorus of tax break proposals, which include an idea from the financial market watchdog to scrap taxes on securities transactions as well as proposals by state oil major Rosneft (ROSN.MM) to ease the tax burden on the oil sector to spur development of new fields.

The letter also proposes to abolish a preferential 10 percent VAT tax rate for socially important goods such as food staples and to increase export and excise duties on heavy oil products to encourage production of lighter products, such as gasoline and diesel.

The ministry said the measures will boost economic growth by 0.6-0.7 percentage points within two years and cut budget revenues by one percent of the GDP.

It also said a lower VAT rate would help curb a widespread usage of tax evasion schemes.

Other measures include tax breaks for expenses on research and development, voluntary medical insurance, corporate contributions to voluntary pension saving schemes and interest payment on mortgages.

The letter also suggests scrapping a 24 percent corporate profit tax for transactions involving stakes of over 10 percent in Russian firms as well as their dividends to encourage firms with offshore ownership to make such deals in Russia.

Russia enjoyed a record economic growth of 8.1 percent in 2007 despite a stagnant oil industry, whose lobbyists complain about an excessive tax burden.

Some economists and officials, including the central bank's monetary policy chief Alexei Ulyukayev, see signs of overheating.

Kudrin has managed to successfully defend the budget and the oil fund where Russia piles up its windfall revenues for years but yielded to pressure last year ahead of the parliamentary and presidential elections, agreeing to raise pensions and wages.

The pressure on fiscal hawk Kudrin, seen by many investors as the architect of Russia's macroeconomic stability, has intensified further in recent weeks raising questions about his future in the new government, which Putin will form as prime minister after he steps down as President in May. (Reporting by Darya Korsunskaya, writing by Gleb Bryanski; Editing by Tim Dobbyn)

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