Slaughtering a sacred cow: How the IT-sector lost its tax breaks

To top up the budget, the government decided not only to hike VAT and taxes on small and medium businesses. For the first time, it is trimming its system of support for the IT industry, one of the few sectors regarded as strategically important and that has long enjoyed a special tax regime.

• Alongside other tax changes, the finance ministry has proposed increasing the tax burden on tech firms in two key ways.
• First, it suggested increasing the insurance premium rate for IT companies from 7.6% to 15%. According to Finance Minister Anton Siluanov, the discount “has fulfilled its purpose.” The industry is highly profitable, and salaries are 2.5 to 3 times higher than the national average. The ministry calculates that this reform would generate about 400 billion rubles ($4.9 billion) over three years.
• In addition, the government plans to cancel the current zero VAT rate on the commercialization of software developed in Russia. The digital ministry assured that this will not have a “significant influence” on company revenues and that other tax breaks and social benefits would remain.
• IT companies, of course, are unhappy. The initiatives were not discussed with market players, said Renat Lashin, executive director of the Domestic Software Association. According to him, the abolition of the zero VAT rate combined with other changes would have a “very negative” impact on the sector.
• Digital Development Minister Maksut Shadayev urged IT companies to “flexibly adapt” to the new circumstances, noting that insurance premiums will still be half those in other sectors. He added that benefits on income tax, mortgages and immunity from the draft for employees will stay in place.

Why the world should care

The IT sector, long viewed as a sacred cow of the Russian economy, is facing its first large-scale revision of tax breaks. For the budget, this means hundreds of billions in additional revenue. For Russian businesses, it’s a signal that even the most sheltered sectors cannot expect to remain untouchable.