Russia to Increase VAT to 22% Amid Swelling Budget Deficit and Slowing Growth

Finance Ministry Proposes VAT Hike

The Russian Federation's Finance Ministry has unveiled plans to increase the standard Value Added Tax (VAT) rate by 2%, elevating it from the current 20% to 22%. This proposed change is slated to take effect next year, forming a key component of the government's new three-year budget strategy. The ministry anticipates this measure will generate an estimated 1.3 trillion rubles ($15.5 billion) in annual revenues.

Addressing Budgetary Pressures and Economic Slowdown

The decision comes as Russia grapples with a substantial budget deficit, which reached 4.88 trillion rubles ($61.1 billion) between January and July, surpassing the government's full-year target. The consolidated budget deficit for the first half of 2025 stood at 4.953 trillion rubles. This fiscal strain is largely attributed to surging defense and security expenditures.

Concurrently, the nation faces a projected slowdown in economic growth. A Finance Ministry forecast, initially reported by Kommersant, indicated Russia's GDP growth slowing to 1% this year, a decrease from an earlier 2.5% estimate, with a further deceleration to 0.5% anticipated for 2026. Other forecasts for 2025 GDP growth vary, with the Bank of Russia projecting between 0.5% and 1%, and the World Bank forecasting 1.4%.

Details of the Proposed Changes

In addition to the standard VAT increase, the Finance Ministry's proposal includes other significant tax adjustments:

• A reduced 10% VAT rate will continue to apply to essential goods, including bread, dairy, meat, medicines, and children's products.
• The VAT threshold for small and medium-sized businesses operating under Russia's simplified tax system will be significantly lowered from 60 million rubles to 10 million rubles.
• New taxes are also proposed for the gambling sector, including a 5% tax on accepted gambling bets and a 25% income tax for bookmakers.

Officials state that the reduction in the VAT threshold for smaller businesses is intended to curb 'fragmentation' schemes, where companies divide operations to avoid higher tax burdens.

Anticipated Economic Impact

The Finance Ministry has sought to reassure consumers, suggesting that the impact of the VAT increase on prices will be 'moderate and limited'. The Central Bank of Russia also believes the effect on underlying inflation would be 'neutral'. However, economists offer a more cautious outlook. T-Investments chief economist Sofia Donets predicts that the overall impact could lead to inflation of approximately 1.5% in the initial months of next year, as businesses adjust prices to maintain margins and pass costs onto consumers.

Past experience indicates that a 2% VAT hike in 2019 contributed 0.6 percentage points to that year's inflation. Critics warn that such tax increases could lead to a higher tax burden, elevated prices for goods and services, reduced consumer demand, and a potential slowdown in economic growth. This marks the second major tax increase within a year, following a reform earlier in 2025 that introduced a progressive tax system and increased corporate contributions to the state budget. The move also contradicts President Vladimir Putin's previous public commitment not to raise taxes until 2030.