A business-friendly Russia
President Vladimir Putin finally sent to the State Duma a bill that would limit taxes on small business to a flat rate of 20 percent.
Apr 10, 2002
President Vladimir Putin finally sent to the State Duma a bill that would limit taxes on small business to a flat rate of 20 percent. The much-anticipated bill also includes a clause that would allow some businesses to operate without going through the cumbersome licensing process.
In all likelihood, the bill will pass, making Russia one of the most small-business-friendly countries in Europe. Combined with the flat income-tax rate of 13 percent and changes to the Labor Code, a business-friendly environment is being created for entrepreneurs and free-market enthusiasts. Add to that the possible passage of a law freeing land for sale - and Russia will become even more attractive to investors.
The Russia Journal has been among the most vocal activists in Russia on these issues, demanding the creation of positive conditions for Russian entrepreneurs, freeing them from the shackles of bureaucracy and tax dragnets. Despite lingering cynicism from many critics - who argue that new laws take years to filter through and become effective - we cannot help but express great satisfaction and optimism about this development.
As with any laws and tax systems in any country there will be people and organizations here who abuse the situation. Larger companies will be broken into smaller ones to take advantage of the benefits. But laws can deal with such violations while removing the barriers that punish the population as a whole and discourage it from enterprise.
In reality, the proposed package surpasses most expectations. With banking and finance sectors facing major reforms that would create conditions for venture-capital activity and a decent capital market, Russia could soon develop a massive self-employed middle class.
In truth, that class has existed for nearly a decade. But it has used the lean tax systems of Cyprus, which enjoys a double-taxation treaty with Russia, or other tax havens to conduct business. The true size of the family and small-business sector in Russia remains largely unknown, but by some estimates nearly 70-80 percent of all activity is still in the shadow economy. Most businesses have no choice but to remain outside the system because current conditions make it impossible for them to otherwise survive.
By imposing a flat rate of 20 percent and taking away the burden of a half-dozen other taxes, the law will also create a reduction in the amount of cash that businesses have to fork out to comply with current accounting regulations - even if they are all fictional requirements at that. It takes away the opportunity from the inspectorates to extort money, and it will finally create a vibrant and clean business environment in which people will choose legal and transparent business activity rather than murky transactions.
The passage of this bill and the land laws mark a major transition in Russia's march toward a civilized market economy. Putin deserves unreserved kudos for his persistence in fulfilling his campaign vows to small enterprises. That a law such as this is making its way to parliament - albeit after two years of promises - also shows that Putin is getting the better of the entrenched bureaucracy that has essentially been living off bribes and commissions from smaller businesses.
If the rest of the legislation in the pipeline can be passed by this autumn and Putin can concentrate on the implementation of these laws, Russia will look like a country poised for dramatic positive change.
A whole new business environment has been created in stark contrast to the one of distrust and little faith after the default of 1998. Both local and foreign businesses have had little trust in successive Russian governments and their ability to deliver on promises. Putin has not only changed that culture, he has delivered on one of the most important of his promises.
Once financial-market reform - a greater challenge than this one - can be implemented, creating a banking system that serves people and enterprises rather than a few rich oligarchs or criminals, the situation on the market will begin to change. A financial amnesty facilitating repatriation of capital could also be very helpful at this stage.
The first to come back will be the Russian capital that has been hidden in offshore shelves for years, enabling Russians to utilize it in investment. Foreign capital could not be far behind.
In all likelihood, the bill will pass, making Russia one of the most small-business-friendly countries in Europe. Combined with the flat income-tax rate of 13 percent and changes to the Labor Code, a business-friendly environment is being created for entrepreneurs and free-market enthusiasts. Add to that the possible passage of a law freeing land for sale - and Russia will become even more attractive to investors.
The Russia Journal has been among the most vocal activists in Russia on these issues, demanding the creation of positive conditions for Russian entrepreneurs, freeing them from the shackles of bureaucracy and tax dragnets. Despite lingering cynicism from many critics - who argue that new laws take years to filter through and become effective - we cannot help but express great satisfaction and optimism about this development.
As with any laws and tax systems in any country there will be people and organizations here who abuse the situation. Larger companies will be broken into smaller ones to take advantage of the benefits. But laws can deal with such violations while removing the barriers that punish the population as a whole and discourage it from enterprise.
In reality, the proposed package surpasses most expectations. With banking and finance sectors facing major reforms that would create conditions for venture-capital activity and a decent capital market, Russia could soon develop a massive self-employed middle class.
In truth, that class has existed for nearly a decade. But it has used the lean tax systems of Cyprus, which enjoys a double-taxation treaty with Russia, or other tax havens to conduct business. The true size of the family and small-business sector in Russia remains largely unknown, but by some estimates nearly 70-80 percent of all activity is still in the shadow economy. Most businesses have no choice but to remain outside the system because current conditions make it impossible for them to otherwise survive.
By imposing a flat rate of 20 percent and taking away the burden of a half-dozen other taxes, the law will also create a reduction in the amount of cash that businesses have to fork out to comply with current accounting regulations - even if they are all fictional requirements at that. It takes away the opportunity from the inspectorates to extort money, and it will finally create a vibrant and clean business environment in which people will choose legal and transparent business activity rather than murky transactions.
The passage of this bill and the land laws mark a major transition in Russia's march toward a civilized market economy. Putin deserves unreserved kudos for his persistence in fulfilling his campaign vows to small enterprises. That a law such as this is making its way to parliament - albeit after two years of promises - also shows that Putin is getting the better of the entrenched bureaucracy that has essentially been living off bribes and commissions from smaller businesses.
If the rest of the legislation in the pipeline can be passed by this autumn and Putin can concentrate on the implementation of these laws, Russia will look like a country poised for dramatic positive change.
A whole new business environment has been created in stark contrast to the one of distrust and little faith after the default of 1998. Both local and foreign businesses have had little trust in successive Russian governments and their ability to deliver on promises. Putin has not only changed that culture, he has delivered on one of the most important of his promises.
Once financial-market reform - a greater challenge than this one - can be implemented, creating a banking system that serves people and enterprises rather than a few rich oligarchs or criminals, the situation on the market will begin to change. A financial amnesty facilitating repatriation of capital could also be very helpful at this stage.
The first to come back will be the Russian capital that has been hidden in offshore shelves for years, enabling Russians to utilize it in investment. Foreign capital could not be far behind.