Corporate Taxation in Russia’s Transitional Period
1993 was one of the most difficult periods in the history of the Russian economy. The country was living through a deep transition from a planned economy to a market one, and that upheaval showed up in a tax system being built almost on the fly.
Federal Taxes: The Backbone of the Budget System
In 1993, Russian enterprises faced an extremely heavy tax burden. A 32% profit tax was one of the main sources of federal budget revenue, but for businesses it meant a serious drain on funds needed for growth and modernization.
Especially painful for business was a 28% VAT — one of the highest rates in the world at the time. It was introduced amid an acute state budget shortfall and hyperinflation running into the hundreds of percent a year. A high VAT was meant to guarantee steady revenue for the treasury, but it also seriously drove up the price of goods and services.
The road-users tax (2.5% of revenue) was a distinctive levy of the time, meant to fund a road-maintenance fund. This tax survived until 2003 and was collected from virtually every enterprise, regardless of whether it actually used the roads in its operations.
Regional and Local Taxes
As the capital and Russia’s biggest economic hub, Moscow had the right to levy additional local taxes. An advertising tax (5–10%) reflected the city government’s desire to draw revenue from a booming ad market.
A local tax for the upkeep of housing stock and social infrastructure (around 1.5%) was meant to offset the city’s spending on municipal services at a time when federal funding for these areas had sharply declined.
Social Contributions: A Soviet Legacy
The 1993 system of social contributions largely echoed the Soviet model, adapted to new economic realities:
- Pension Fund (28%) — the largest social contribution, meant to guarantee pension payments amid a demographic crisis
- Social Insurance Fund (5.4%) — for paying sick leave and maternity benefits
- Mandatory Medical Insurance (3.6%) — a new institution meant to replace free Soviet healthcare
- Accident Insurance (0.2–8.5%) — rates varying by how hazardous the industry was
A Practical Example of the Tax Burden
Calculation for a Business with 1 Million Rubles in Revenue:
Revenue after VAT: 781,250 rubles (VAT: 218,750 rubles)
After profit tax: 531,250 rubles
After road tax: 517,969 rubles
After local taxes: 510,200 rubles
After social contributions: 321,426 rubles
Paid out to employees: 282,855 rubles (after 12% income tax)
Economic Consequences
As this calculation shows, the total tax burden reached 71.7% of a business’s original revenue. That level of taxation had serious economic consequences:
First, enterprises were forced to operate under a severe shortage of working capital, hampering their growth and modernization. Second, high taxes fueled the shadow economy — many businesses tried to hide part of their income or shift to cash transactions.
Third, this tax system fed inflation, since enterprises had to bake high taxes into the price of their goods and services.
Historical Significance
The 1993 tax system reflected the contradictions of the transitional era: on one hand, the state needed substantial revenue to sustain its social obligations and keep the government apparatus running; on the other, Russia’s young private business sector needed favorable conditions to grow.
This system didn’t last especially long — tax rates began gradually falling by the mid-1990s, and a sweeping tax reform in the early 2000s produced the modern Russian tax system.