Russian Finance Ministry suggests reducing unified social tax from 2005

The Russian finance ministry suggests reducing from 35.6% to 26% the basic rate of the unified social tax (ESN) and to modify the existing regressive scale of this tax.

Relevant amendments to legislation were submitted on Friday to the government as part of the package of bills on the tax reform.

With the annual salary under 100,000 rubles per one worker, the taxpayer-employer pays the ESN at 35.6%; with the annual salary from 100,000 to 300,000 rubles, the employer pays 20%; from 300,000 to 600,000 rubles, the employer pays 10%; if the salary is over 600,000 rubles a year, the employer pays 2%.

The finance ministry suggests fixing the ESN at 26% for incomes under 300,000 rubles per year, 10% for incomes from 300,000 to 600,000 rubles, and 2% for incomes over 600,000 rubles a year.

Earlier, Finance Minister Alexei Kudrin said that as a result of ESN reduction, enterprises will have additional 280 billion rubles a year. In his words, funds may be spent to raise wages and to invest in production, and, thus, become an additional impetus of economic growth.

According to finance ministry calculations, the reduction of ESN receipts next year could total about 216 billion rubles. However, in Mr. Kudrin's words, the reform must contribute to legalization of the labor remuneration funds, which will make it possible to partly compensate for losses from this tax's reduction. With account for the extension of the tax base as a result of legalization of wages, the drop-out revenues are forecasted at some 185 billion rubles.

Part of the losses of state off-budget funds is to be compensated for from the federal budget. Mr. Kudrin said the Pension Fund would receive additionally some 167 billion rubles in 2005, and the Compulsory Medical Insurance Fund, 16 billion rubles.

Besides, the ESN reduction will be accompanied by major reformation of the social sphere. Changes will be introduced in the existing system of provision of pensions, into the laws on medical and social insurance.

The health and social development ministry is expected to submit to the government a package of relevant bills by April 11.

"Reformation of the ESN will be conducted with no damage inflicted on the country's social programs," Mr. Kudrin is sure.