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Higher social insurance taxes ruin Russia’s small businesses

March 12, 2013, 15:28 UTC+3 Alexandrova Lyudmila

MOSCOW, March 12 (Itar-Tass) – High social insurance deductions are ruining Russia’s small businesses, which have not found their feet yet. As the deductions have been raised, a hundred thousand individual businesses have to close down or resort to shadow schemes every month. In the meantime, the Pension Fund’s deficit, which the social fees’ rise was expected to reduce, remains as big as it has been all the way. Experts say the pension system’s principles of operation should be revised, and not donations increased.

Since last December about 300,000 individual businessmen have been forced out of business, the director of the small and medium business and competition department at the Economic Development Ministry, Natalya Larionova, said on Monday. Russia is experiencing such a significant reduction in the number of individual businessmen for the first time. The sharp rise of social taxes on small firms is the reason.

Since January 1, 2013 Russia has more than doubled the annual insurance fee for individual businessmen and self-employed people. Before, the sum of insurance deductions established for individual businessmen stood at about 17,000 rubles (about 600 dollars). Now businessmen have to pay a little less than 36,000 to various extra-budgetary funds. This is the sum the businessman pays for oneself. If there are hired employees, the businessman has to pay for them, too. The raised deductions go to the Pension Fund and the Mandatory Medical Insurance Fund.

The government explains the deductions were raised because the self-employed persons in fact pay nothing to the Pension Fund, but in old age they all apply for government support.

On February 1 there were 3.9 million individual businessmen and private farms left (according to the unified state register) – 5 percent less than there were on November 1, 2012, when their number was at several years’ record-high.

“Most of those who have terminated their registration keep working, but in the shadow,” Larionova speculates. “They keep using medical services and sooner or later they will come to ask for pensions. In the meantime, there is a risk the rise in deductions will not only fail to raise more money for the social funds, but on the contrary, cause a downturn.”

Higher insurance deductions on individual businessmen has already had very negative social and economic effects, says the non-governmental organization of small and medium businesses – The Pillar of Russia. “Social deductions were raised with the aim to help reduce the deficit of the Pension Fund,” the organization says in a statement. “It was hoped that the deficit would shrink by 47 billion dollars as a result of the measure. However, as ever more individual businessmen have canceled their registration, the Pension Fund’s budget should brace for a 9.5-billion-ruble shortfall.

Economic Development Minister Andrei Belousov has said more than once that his agency would not support the government’s decision to raise insurance deductions. Instead, the Economic Development Ministry suggested changing approaches to calculating the rate of social insurance taxes to be paid by individual businessmen.

“For those individual businessmen who have the minimum income it might make sense to restore the previous system. To continue to charge insurance fees based on one minimum wage,” Larionova said. “There are hundreds of thousands of such businessmen in Russia. It is these people who were the hardest-hit by the January 1 rise.”

In the meantime, the Labor Ministry has told the daily Rossiiskaya Gazeta that its position remained unchanged: “individual businessmen who would like to have a normal pension are expected to pay proportionate insurance fees.”

The deputy director of the small and medium business development and competition department at the Economic Development Ministry, Vitaly Melnikov, believes that if the segment of individual businessmen keeps shrinking at the current rate, the economy will lose up to one million jobs over one year. According to his estimates, 22 million people of able-bodied age are not registered in the economy at all.

Public activist Irina Khakamada, who in the 1990s led the Russian government’s state committee for small businesses, believes that the authorities are not interested in the preferential taxation of businesses. “If the world recession goes from bad to worse and the export of oil and gas keeps falling, ever more money will have to be taken away from business people in order to honor social liabilities,” Novyie Izvestia quotes Khakamada as saying. In her opinion, the current reduction in the number of individual businessmen is not the end of the story yet.

The expert warns that the numerous programs for supporting small businesses (the government has produced quite a few of them over the past year years) will be of little help.

“These programs are very patchy and fragmented. They will be unable to create an environment in which the business will be growing by themselves,” Khakamada said. “The programs are good, if there is a normal environment. If there is no environment, no programs will help.”

“The government is inside a vicious circle, because the existing system of insurance deductions is very ineffective,” says the deputy chairman of the State Duma’s committee for economic policies, innovative development and enterprise Mikhail Yemelyanov. “Deductions are being raised, the number of businessmen is shrinking, and the tax burden on the others is getting heavier.” Yemelyanov sees a way out in reforming the principles by which the pension system operates, and then those of the other funds.