Russia won’t increase company tax in the next three years despite its budget deficit. Companies have called for tax cuts. But even the possibility of lower VAT in two years looks vague.

Russia’s top economic decision makers have clashed over possible tax cuts to help business through the first recession in decade. Despite a budget deficit of 8% the Government wont increase the tax burden on companies in the next two years. But from 2011 Russian firms will have to pay higher social tax levies.

To maintain the economic competitiveness of Russian business, Presidential Aide Arkady Dvorkovich has proposed offsetting the increase by cutting the Value Added Tax (VAT) rate from its current level of 18%.

“Value Added Tax is most likely to be drastically cut by 2011. There is an ongoing debate on that in the Government. The Business community and the Ministry of Economic Development want it to be 10- 12%. But the final say will be up to the Finance Ministry.”

And the finance ministry says no. Alexei Kudrin, Russia's Finance Minister warns tax cuts would undermine falling budget revenues and result in higher interest rates and devaluation. Business however says higher taxes in 2011 will be damaging for domestic producers.

Moreover the tax authorities intention to concentrate attention mainly on big businesses hasn’t gone down well, with David Yakobashvili, Head of Wimm-Bill-Dann predicting dire outcomes.

“I hope that it's partly a joke and something will be changed and wisdom will take over. Otherwise we're going to kill some businesses.”

The government plans to take a final decision on VAT cuts no earlier than next spring. But the cracks that have appeared in the government’s united front on the crisis mean that the issue might not be settled for some time.