Absolute necessity: Experts assess the Ministry of Finance's proposal to increase VAT to 22%

Inevitable—perhaps this is the word that best describes the decision to increase the standard value-added tax (VAT) rate from 20% to 22%. The changes are "aimed primarily at funding defense and security"—this formulation from the Ministry of Finance speaks to two things: the state's priorities remain unchanged, and in the context of the SVO and a budget deficit of 4.1 trillion rubles, they require extraordinary measures.

The corresponding amendments to the Tax Code are planned to be introduced as part of the budget package of bills. If adopted, they will come into force on January 1, 2026. According to Anton Siluanov's department, the preferential 10% rate will remain in effect for socially significant goods such as food, medicine, and medical devices.

VAT was initially introduced in Russia in 1992 at a rate of 28%. However, it was reduced to 20% a year later, and to 18% ten years later. In 2019, it was returned to 20% to cover part of the costs of funding measures implemented under President Vladimir Putin's new May decree. Then, in December 2018, the Central Bank, preliminarily estimating the contribution of a 2 percentage point VAT increase to inflation at around 1 percentage point, raised the key rate from 7.5% to 7.75% even before the new tax rate came into effect.

Elvira Nabiullina expressed her unambiguous approval of the measure (which didn't seem as obvious back then as it does now) and the potential impact on inflation on September 12. According to her, the regulator prioritizes balancing the federal treasury over raising specific taxes. "If there are additional budget expenditures, it's better for them to be covered by revenues rather than by increasing the budget deficit," the head of the Central Bank noted.

VAT is one of the main sources of budget revenue. In 2024, VAT revenues on goods sold within Russia increased by 21.6% to 8.7 trillion rubles, while VAT revenues on goods imported into the Russian Federation increased by 8.7% to 663 billion rubles.

"The Russian Ministry of Finance has proposed another tax 'fine-tuning' in 2026—in addition to the increases in corporate income tax rates and personal income tax for the wealthiest groups of the population that began this year," says Natalia Milchakova, leading analyst at Freedom Finance Global. "This time, the 'fine-tuning' will affect VAT. After the rate was raised to 20% six years ago, it generated an average of 640-660 billion rubles annually for three years. In 2024, the three-year forecast projected that the budget deficit could reach 2.2 trillion rubles in 2026 and rise to 2.7 trillion in 2027, but the VAT increase was not included in the projected budget for 2026 or subsequent years."

The extent to which the deficit will shrink remains unclear, as various scenarios exist. One is a deficit-free budget, as the new VAT rate, the abolition of several benefits, the introduction of an additional tax on gambling, and the lowering of the revenue threshold for small and medium-sized businesses to switch to the simplified tax system (STS) could theoretically reduce the deficit to zero. Another scenario envisions a deficit increase to more than 2 trillion rubles, as government spending is projected to accelerate in 2026, while oil and gas revenues remain low.

According to Milchakova, for businesses, this measure will mean increased costs and the need to raise prices, which could lead to a short-term spike in inflation in early 2026. However, experience in 2019 showed that the acceleration of inflation associated with the new tax rate and monetary policy tightening lasted no more than one quarter. Overall, the VAT increase is not expected to have a significant negative impact on businesses and consumer demand.

"The Finance Ministry's proposal is strictly targeted: it's clear that the military defense will continue, meaning spending on 'defense and security' will increase," argues Nikita Maslennikov, a leading expert at the Center for Political Technologies. "By adding two percent to the VAT rate, the state will be able to increase its revenue base by approximately 1 trillion rubles. This means that while VAT is expected to reach 15.7 trillion rubles by the end of this year, it could reach around 17 trillion in 2026. As for the impact on inflation, I'd like to remind you that in 2019 (when the rate was raised by 2 percentage points), it actually turned out to be lower (around 3%) than the Central Bank had projected."

Maslennikov notes that this measure appears absolutely inevitable: if you don't raise taxes, you'll have to keep the government borrowing going. This means ever-increasing budget expenditures, and the situation is beginning to resemble a Ponzi scheme. Growing public debt typically poses more serious risks to the economy, businesses, and the population than increasing the fiscal burden. It's also important that this requires a constant (not sporadic) influx of funds into the federal budget.

"The increase in the VAT rate to 22% is necessary to offset the record budget deficit, which amounted to 4.1 trillion rubles over the first nine months," notes Denis Astafyev, head of the fintech platform SharesPro. "The government expects the additional increase in tax revenue to generate approximately 1–1.5 trillion rubles annually, which will allow it to partially cover military expenses and social obligations. In this regard, the decision appears to be a necessary step when other quick sources of income cannot be found."

Read the article on the topic: The Ministry of Finance is changing taxation.