A Compromise Measure Solves the Problem of Small Business Withdrawing into the Shadows

Last week, the State Duma approved in the first reading the draft law which provides for reduction of the amount of insurance pension contribution for individual entrepreneurs (IE).

With the annual income of below RB 300,000, the amount of insurance payments is determined on the basis of one minimum monthly wage equal to Rb 5,205. So, as regards IE engaged in small business the aggregate amount of the insurance contribution will amount to Rb 19,425 a year with a 26% deduction to the pension fund and a 5.1% deduction to the social insurance fund. As regards IE whose annual income exceeds Rb 300,000 a year, insurance contributions will be totaled on the basis of one minimum monthly wage plus 1% of the amount which exceeds the value of the actual annual income.

It is a compromise measure. The thing is that until January 1, 2013 pensions to entrepreneurs engaged in small business were actually paid at the expense of other taxpayers. To receive a base pension, an entrepreneur has to work for five years and pay relevant insurance contributions within that period. But the state pays the pension for minimum 19 years, not 5 years. Actually, all the taxpayers subsidized small business entrepreneurs. To restore justice, a decision was taken that from January 1, 2013 the amount of insurance contributions is to be increased on the basis of two minimum monthly wages and not one as it was before.


However, the above decision has turned out to be disastrous to small business because each entrepreneur has tо pay in total about Rb 35,000 a year which sum is twice as much than in 2012. As a result of increase in insurance contributions, a large-scale closure of IE took place. By April 2013, 350,000 entrepreneurs or 10% of the total number of entrepreneurs closed down their business.


The above compromise measure solves the problem, however there is a risk that entrepreneurs whose annual income exceeds Rb 300,000 may split their business in order to pay insurance contributions only on the basis of one minimum monthly wage.


V.S. Nazarov, PhD (Economics), Head of the Budget Federalism Department