Russia's VAT Phase-In Plan: A Blow to Small Businesses

Russia has revised its plan to lower VAT thresholds for small businesses after backlash. New thresholds start in 2026, with gradual decreases through 2028 to support military funding. Critics warn it increases pressure on businesses, risking closures and job losses in a significant GDP sector.

The Russian government has revised its strategy to lower the value-added tax (VAT) thresholds for small businesses, opting for a phased approach starting in 2026. Prime Minister Mikhail Mishustin announced this change after business owners strongly opposed the initial proposal to implement the new tax rules immediately.

Initially, the government's draft budget suggested that businesses with annual revenues over 10 million roubles would be subject to VAT, down from the current exemption threshold of 60 million roubles. Business lobbies argued that this sudden adjustment, primarily aimed at funding Russia's military operation in Ukraine, would adversely affect one in ten small-business owners, potentially forcing some to close.

To mitigate the impact, the government proposed a phased decrease to 20 million roubles in 2026, reducing further to 15 million in 2027, and finally to 10 million by 2028. Despite this concession, economist Evgeny Kogan highlighted the increasing tax burden on small businesses. Additionally, a proposal to raise the general VAT rate to 22% from 20% is underway, expected to yield significant revenue to address the budget deficit.

(With inputs from agencies.)