* Excluding revenues of targeted budgetary funds which are raised from taxes and other compulsory payments.
** Without regard for intrabudgetary transfers.
Source: The RF Ministry of Finance and the authors’ estimates.
In 2003, a reduction in accrued budget arrears in absolute terms was registered for the first time over the entire period since the crisis 1998 ( refer to Table 9 ), which accounted for about 2 bln rubles. The amount of arrears increased by 11 bln rubles over 2003, while since 2000 there was noted a gradual reduction of this parameter. Therefore, the reduction in tax arrears in 2003 was governed primarily by reduction of deferred and suspended payments due to the budget system.
Tax Arrears to Consolidated Budget
Tax arrears to consolidated budget (bln rubles)
including back tax
Share of back tax in arrears
Annual growth in arrears against arrears early in the year, adjusted to inflation.
Growth in arrears in terms of GDP share
Source: the RF ministry of Taxation and estimates of the Institute for Economy in Transition.
The amount of accrued VAT arrears to the federal budget in 2003 was increased by 2,6 bln rubles against that early in the year and accounted for about 244 bln rubles. However, VAT arrears in real terms was reduced by 9,6% against that at year-end 2002. Profit tax arrears to the federal budget was reduced in 2003 by approximately 7,5 bln rubles and accounted for about 26,4 bln rubles, thereby it reached the minimum since early in 2000 ( Figure 21 ). In general, despite a stabilization in VAT arrears in the second half of 2003, the figures of the last two years show a gradual decrease in both VAT and profit tax arrears.
Accrued Real Tax Arrears to Federal Budget, bln rubles ( in prices as of December 2003 ).
2.2.2. Basic Tax Revenues in 2003
A series of amendments to the tax legislation came into force since 2003 in accordance with the decisions made in 2002. Among the most relevant amendments are introduction of sections to the Tax Code on taxation of small businesses, definitive abolition of road taxes and introduction of transportation tax, as well as adjustments to the procedure of oil-product excise payment ( introduction of an institution of registration certificates for operations with oil products )3.
Referring to Table 10, profit tax revenues also tended to decrease in 2003. However, the revenues declined in less amounts than in the previous year ( 0,2 in terms of percentage points of GDP against 1,5 in terms of percentage points of GDP in 2002 ) with consolidated profit of the economy totaling 131% in 2003 against 83% in 2002. Despite a positive macroeconomic trend in 2003, profit tax revenues were reduced due to several reasons, primarily as a consequence to the Tax Code amendments on the corporate income tax, which changed substantially both the structure and the amount of taxable base, mostly in favor of growth in expenditures which can be deducted in defining a taxable base4. The decrease in profit tax revenues due to the foregoing factor accounted for 0,12% of GDP according to the estimates of the RF Ministry of Finance.
In 2003, the share of income tax revenues in GDP increased by 0,1 in terms of percentage points against 2002 and accounted for 3,3% of GDP. The amount of income tax revenues in 2003 exceeded by 13,6% in real terms that in the previous year, which is mostly explained by a personal income growth.
The share of unified social tax revenues in GDP was reduced by 0,4 in terms of percentage points against the previous year. The unified social tax revenues also declined by 4% in real terms against 2002. The reduction was caused mainly by the fact that a substantial amount of unified social tax revenues in 2002 was achieved by entering the share of the unified social tax arrears, which previously used to be entered to the RF Pension Fund, to the federal budget. Eventually, the growth in the unified social tax arrears to the federal budget in 2002 accounted for about 8,2 bln rubles ( 6,9 bln rubles of redeemed arrears to the RF Pension Fund was entered to the federal budget ), while it accounted for about 15,5 bln rubles ( or a little more than 0,1% of GDP ) in 2003.
Legalization of wages and all personal incomes varies in rate as shown in Table 10. This can be explained by enlarged gap between taxable bases of unified social tax and income tax. Though there was no gap whatsoever in 2000, a small gap of 100 bln rubles emerged in 2001, about 600 bln rubles in 2002, and approximately 1 tln rubles in 2003, according to preliminary assessment.
Tax Base for Unified Social Tax and Income Tax in в 2000–2003 (tln rubles), according the RF Ministry of Taxation
Unified Social Tax
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* Preliminary assessment.
Source: the RF Ministry of Taxation.
Evidently, the taxable bases of income tax and unified social tax are imbalanced in favor of the former. It will be recalled that while the taxable base of unified social tax only includes wages and emoluments to physical bodies or earnings less business expenditures of self-employed entrepreneurs and lawyers ( i.e. payment for labor exclusively ), the taxable base of income tax includes all earnings of physical bodies. The foregoing gap that emerged between the taxable bases of unified social tax and income tax in 2002 to 2003 is indicative of two factors.
Firstly, there was an increase in payments to employees from corporate net income, which are not subject to the unified social tax. Conditions for tax arbitration occur if the maximum wage tax rate of a particular employee exceeds the maximum taxable corporate income rate. Such situation occurs if no descending scale of unified social tax is applied to the employee.
Secondly, introduction of a 1% flat rate of income tax resulted mostly in legalization of income which is not related to wages. This hypothesis can be supported by the a survey conducted by the IET’s experts5, which reveals a big share of legalized income among wealthy individuals, i.e. those who also have non-wage income.
The amount of VAT revenues in 2003 accounted for 6,6% of GDP, which is 0,3 less in terms of percentage points of GDP than in 2002. A corresponding decline in VAT revenues as a share of GDP took place in 2002 as well. Nevertheless, VAT revenues grew by 4,6% in real terms against the corresponding period of the previous year. Among the factors which led to a decrease in VAT revenues in 2003 are an increase in the amount of recoverable VAT in cases of export manufacturing. This factor is responsible for a decrease in revenues by approximately 0,4% of GDP, according to the assessment of the RF Ministry of Finance.
Excise revenues grew by 0,2 in terms of percentage points of GDP in 2003 against 2002, while 0,1 less than in 2000 in terms of percentage points of GDP. The growth in revenues against the previous year is mainly due to an escalation in export prices of gas.
The amount of mineral tax revenues in 2003 accounted for 2,6% of GDP, which corresponds to that in 2002. However, considering a positive and high growth rate of GDP in 2003, the amount of mineral tax revenues exceeds by 7% that in the previous year in real terms. Among the basic factors responsible for the growth in mineral tax revenues in 2003 are high world’s oil prices and oil production growth since 2002, by more than 10%.
The amount of foreign trade tax revenues in 2003 accounted for 3,4 in terms of percentage points of GDP, which is more than in 2002, but less than in 2001. The growth of foreign trade tax revenues accounted for 25% in real terms in 2003 against the previous year, which, in particular, was determined by increased oil export prices and high oil prices6. For instance, average annual growth in Brent oil prices accounted for about 20% over three quarters of 2003, basically owing to a 49% price rise in the first quarter of 2003.
Reduction in several tax revenues in 2003 against the previous year is explained to a certain degree by additional chapters expected to be added to the Tax Code of the Russian Federation in 2002 in respect of a simplified taxation system for small businesses and a unified tax on imputed earnings. In particular, application of a simplified taxation system provides for replacement of corporate income tax ( income tax for self-employed entrepreneurs ), VAT, sales tax, property tax and unified social tax with a unified tax to be assessed on the basis of economic operations performed during the fiscal period. In 2003, the total amount of revenues generated from the tax on imputed earnings, as well as the tax levied in connection with application of the simplified taxation system, accounted for about 30 bln rubles, or 1% of the amount of tax revenues of the consolidated budget.
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