Russia Adjusts VAT Cut Timeline for Small Businesses Amid Entrepreneur Concerns

Russia will gradually implement its plan to increase the value-added tax (VAT) for small businesses, following warnings from entrepreneurs that sudden changes could severely impact the sector, Prime Minister Mikhail Mishustin announced on Thursday.

At present, small and medium-sized enterprises that utilize the simplified tax system are exempt from VAT if their annual revenues do not exceed 60 million rubles ($739,000). The Finance Ministry suggested lowering this threshold to 10 million rubles ($123,000) as part of a larger initiative to raise the VAT rate from 20% to 22% by 2026.

Mishustin stated that the new proposal will introduce the reduced threshold in stages. It will commence at 20 million rubles in 2026, drop to 15 million rubles in 2027, and finally reach the initially intended 10 million rubles in 2028.

He also mentioned that the government is contemplating a temporary suspension of penalties for businesses that violate the new regulations for the first time.

“Throughout the comprehensive discussions, we took into account suggestions from lawmakers, business leaders, experts, and NGOs regarding tax reforms, which were presented to the president,” Mishustin said during a government meeting.

This decision comes amid rising concern among entrepreneurs and business associations who caution that many small businesses may be compelled to close or operate in the informal economy.

Small and medium-sized enterprises make up over 20% of Russia’s GDP and account for 31 million jobs, or 40% of the total workforce, according to data from the Economic Development Ministry cited by Reuters.

Currently, about 1.4 million companies and 3.1 million individual entrepreneurs in Russia benefit from the simplified tax system, allowing them to pay lower flat rates and be exempt from VAT until they reach the current income cap.

Business news outlet The Bell estimated that the proposed reduction in the VAT exemption threshold could impact up to 450,000 small enterprises, mainly in the retail, services, and manufacturing sectors.

According to The Bell, the lower house of the State Duma is expected to incorporate Mishustin’s adjustments into the tax reform bill before its second reading.