Russias VAT Hike to 22%: A Response to Economic Challenges and Sanctions

On Friday, President Vladimir Putin approved a significant tax reform that will increase Russia’s value-added tax (VAT) from 20% to 22% starting next year. This decision aims to address the budget deficit resulting from escalating military costs and declining oil and gas revenues due to Western sanctions.

Additionally, more small businesses will be incorporated into the VAT system as part of the new measures. The revenue threshold for firms obligated to pay VAT will be reduced from 60 million rubles ($732,000) to 10 million rubles ($122,000).

Surveys indicate that businesses plan to directly transfer the impact of the tax increase to consumers, who have already been under pressure from rising inflation associated with war-related expenditures in recent years.

Economists, including those from the Finance Ministry, have expressed expectations of a slight uptick in inflation as the VAT increase takes effect next year.

VAT serves as one of the primary revenue streams for the government, contributing 11.5 trillion rubles ($148 billion) from January to October, accounting for over 38% of total federal revenue.

With these changes, certain essential items like select food products, medications, and children’s goods will continue to be subject to a reduced VAT rate of 10%. However, specific dairy products made with milk-fat substitutes, including processed cheeses and spreads, will now incur the full 22% tax.

Russia last increased VAT in 2019, raising it from 18% to 20%.