Tax Holidays

Late in October 2014, the Government of the Russian Federation has introduced for consideration to the State Duma of the Russian Federation a draft law which establishes the right of regions to introduce tax holidays for entrepreneurs using a simplified system or patent system of taxation.

A condition for that is a switchover to either regime within a period of two years fr om the day of registration of a person as an individual entrepreneur with the tax authorities.

Privileged tax conditions will consist in application of a zero tax rate to the income received by individuals, that is, actually complete exemption of those incomes from taxation within one or two tax periods by decision of a constituent entity of the Russian Federation. Privileges will be granted to entrepreneurs working in industry, social and research spheres. Also, limitations will be introduced as regards the average number of workers and the maximum amount of income received from sales.

It is believed that tax holidays are introduced on a temporary basis for the period of up to 2020 and will be applied only to newly-established individual entrepreneurs, so, no decrease in budget revenues is expected.

In our view, a decision to support the small business is a timely measure for the state and a popular one. According to the data of the Rosstat, the number of actively working individual entrepreneurs is gradually decreasing: in 2013 their number amounted maximum to 2.5m, while in 2012 and 2008, to over 2.6m and 2.7m, respectively.
In addition to the above, the problem related to the pattern of the small business -- whose representatives usually prefer to work in commerce as the most profitable and simple field in terms of getting economic benefits – is always a topical one. On the basis of the results of 2013, it was registered that nearly 50% of all the entrepreneurs engage in wholesale and retail trade, while, for example, in manufacturing less than 5% of individual entrepreneurs is engaged.

The proposed concept of amendments excludes the situation wh ere the right to a tax privilege could be granted to a person who opened earlier his/her business, but took a decision to carry out simultaneously another line of business; privileges in respect of that business could be granted only to those entrepreneurs who were not registered earlier. Thus, the law does not apply to entrepreneurs who are already registered.

However, the proposed measure could become a good motivation for the existing entrepreneurs to start another line of business which is more required in the economy and that situation would have a favorable effect on the quality of development of the small business in Russia.

In addition to the above, the procedure for a switchover by an entrepreneur to tax holidays needs to be specified. Tax holidays are granted provided that a person is on a special tax regime and constitute a kind of a privilege within a privileged regime.

Another condition is the fact that an individual entrepreneur engages in the above listed types of activities. However, it is not specified in the draft law from which date the entrepreneur should carry out activities in industrial, social and research fields in order to receive the right to tax holidays: such a date is both the registration of the individual entrepreneur and the date of his/her switchover to a special tax regime.

It remains unclear whether the idea that an entrepreneur should work immediately in any of the above fields or may after its first registration with the tax authorities change the type of activities before switching over to a special tax regime is fixed in the draft law. That issue is to be solved before amendments are introduced into the Tax Code of the Russian Federation, otherwise, it is highly likely that rules of application of tax holidays may be interpreted differently. In our view, that issue can be resolved by way of introduction of the provision to the effect that a person carries out immediately one of the above types of activities from the date of registration with tax authorities. Otherwise, such entrepreneurs will not differ much from those who opened their business earlier and whom the tax privilege is not originally applied to.

Vladimir Gromov, PhD (Economics), Senior Researcher of the Fiscal Policy Department of the Gaidar Institute and the RANEPA