Medvedev Orders Tax Relief for Small Businesses

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Dec. 1 – President Dmitry Medvedev ordered US$3.3 billion in tax relief for small businesses during his annual state-of-the-nation address on Tuesday.

Announcing the tax move, Medvedev said he felt compelled to mitigate the effects on businesses of an increase in payroll taxes that comes into effect in January 2011 to raise US$14.83 million for healthcare system upgrades.

The government, whose coffers are hard hit by the international financial crisis, will raise the tax which companies pay to pension, social insurance and obligatory medical insurance funds from 26 percent to 34 percent starting next year.

“I have decided to provide a two-year transition period for small businesses operating in the manufacturing and social spheres with a lower rate of 26 percent,” he said.

The measure, if approved by the State Duma, would save businesses US$3.3 million over the two years, Kremlin aide Arkady Dvorkovich told reporters after the address.

The government may submit legislation for the tax break later this week and is hoping it will come into force before the new year, he added.

Under existing legislation, Dvorkovich said, the tax burden would rise so dramatically that many businesses would be unable to pay.

“I don’t think we should consider this money as losses for the budget,” he said in comments after Medvedev’s speech.

The businesses favored by Medvedev represent just 5 percent of Russia’s small business, while the others will still take a huge blow from the tax increase, Boris Titov, chairman of the Delovaya Rossia association of small and medium-sized businesses, told The Moscow Times.

Hard pressed by the higher taxes, they will hide their accounting from the authorities, he warned.

“(The lower rate of social tax for two years) must be considered as a significant support for small business as the increase is a hard load to them,” Natalia Orlova, chief economist at Alfa Bank, said to Reuters.

Medvedev also said that regional governments should take steps to improve the investment climate by reducing the time it takes to issue business permits and creating turn-key industrial sites, among other measures.

“The main goal is to increase the effectiveness of companies and to attract investment,” he stated.

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