Russia Proposes VAT Hike to Fund Escalating Military Expenditures

Russian Federation to Raise VAT Amidst Wartime Economic Strain

The Russian Federation's Ministry of Finance has put forward a proposal to increase the standard Value-Added Tax (VAT) rate from 20% to 22%, effective January 1, 2026. This measure is a central component of the government's draft budget for 2026-2028 and is primarily intended to bolster funding for the nation's defense and security sectors, which have seen expenditures surge due to ongoing military operations.

The proposed tax hike is projected to generate an additional 1 trillion rubles (approximately $11.9 billion to $15.5 billion) to 1.3 trillion rubles in annual revenue for the federal budget. This significant increase in revenue is deemed necessary to address a widening budget deficit, which reached 4.88 trillion rubles ($61.1 billion) between January and July, already exceeding the government's full-year target.

Funding Defense and Security Needs

Official statements from the Finance Ministry indicate that the additional funds are 'aimed primarily at financing defence and security needs' and 'to provide financial support for the country's defence and security needs, and social support for families of participants in the special military operation.' The ministry emphasized that the revenue would enable the armed forces to be equipped with 'the necessary weapons and military equipment,' cover 'salaries to military personnel and support their families,' and facilitate the 'modernisation of defence industry enterprises.'

The increase comes as Russia's military spending has reached record levels, consuming a substantial portion of the federal budget. In 2024, VAT accounted for nearly 37% of all federal budget revenues, highlighting its critical role in government financing. The last time Russia raised its VAT rate was in 2019, from 18% to 20%.

Economic Implications and Other Tax Measures

While the standard VAT rate is set to rise, a reduced 10% VAT rate will remain in place for essential goods, including:

• Food
• Medicines and medical products
• Children's products

However, the proposed changes are expected to have broader economic impacts. Economists have suggested that the VAT increase could contribute to inflation, with some predicting an increase of around 1.5% in the initial months following its implementation. The Central Bank had previously noted that the 2019 VAT hike contributed 0.6 percentage points to that year's inflation.

In addition to the VAT increase, the Finance Ministry's draft budget includes other tax reforms aimed at boosting revenue. These include:

• New taxes on bookmakers, comprising a 25% corporate income tax and a 5% tax on accepted bets.
• A lowered income threshold for small businesses eligible for simplified VAT payments, reducing it from 60 million rubles to 10 million rubles.

The proposed tax adjustments come despite earlier assurances from President Vladimir Putin, who had pledged no major tax changes before 2030. The draft budget, which has reportedly received pre-approval from President Putin, is anticipated to pass through parliament without significant resistance.