Russia's MinFin proposes to hike VAT to 22% as of Jan 1, 2026

MOSCOW. Sept 24 (Interfax) - Russia's Finance Ministry is proposing to raise the general value-added tax by 2 percentage points to 22% from 20% and earmark the additional revenue this will generate foremost for defense and security spending, the ministry said in a press release on the submission of its budget package to the government.

The submitted package of bills include amendments to the law on the budget for 2025, the bill on the federal budget for 2026 and the planning period of 2027 and 2028, as well as bills to make amendments to the budget and tax codes.

The ministry did not specify the main parameters of the budget plan for the next three years and proposed changes to this year's budget. It was reported earlier that the deficit target for 2025 would probably be raised from the current 1.7% of GDP.

The preferential VAT rate of 10% will be maintained for all socially important goods, such as food, drugs and medical products, products for children and so on, the ministry said.

If the amendments to the Tax Code are passed, they will go into effect on January 1, 2026.

Russia introduced the VAT in 1992 with a rate of 28%, but it was lowered to 20% just a year later and then to 18% ten years after that. In 2018, it was raised back to 20% to cover some of the spending needed to fund measures to carry out President Vladimir Putin's new May decree. At the time, the Central Bank of Russia (CBR) tentatively estimated that a 2 pp VAT hike would add about 1 pp to inflation and preventatively, even before the new tax rate went into effect, raised its key interest rate from 7.5% to 7.25% in December 2018.

Then, like now, the decision to hike the VAT became public right before its announcement. As recently as in June, at the St. Petersburg International Economic Forum, Finance Minister Anton Siluanov said that there were no plans for new revisions to the tax system, despite the difficult budget situation this year.

At the end of August, Siluanov said proposals were being prepared "for filling the budget with the necessary financial resources so that all objectives to fulfil social obligations to people, and fulfil objectives to realize national development goals are supported with the necessary resources," but he did not mention potential tax changes.

The president, in turn, said federal budget revenues need to be boosted by increasing the efficiency of production and labor productivity. "We need to work on the revenue side. There's something to talk about here, meaning, of course, not an increase in the tax burden, but an increase in the efficiency of production. We need to raise labor productivity, introduce the latest technologies, better organize production. We have something to work on here and countless reserves, meaning there are big opportunities here," Putin said at the plenary session of the Eastern Economic Forum on September 5.

Central Bank chief Elvira Nabiullina, asked what she thought about a possible VAT hike and how it could affect inflation and efforts to bring it back on target, said on September 12 that a balanced federal budget is more important for CBR interest rate decisions than an increase to any specific tax.

"If there are additional budget expenditures, it's better that they are covered with revenues, not by increasing the budget deficit. Because if the budget deficit grows to cover the necessary spending, with an increase in the budget deficit our rate will be higher," Nabiullina said.

The VAT is one of the main revenue items in the federal budget. Revenue from VAT on goods sold in Russia grew by 21.6% to 8.7 trillion rubles in 2024, and revenue from VAT on goods imported into Russia rose 8.7% to 663 billion rubles.