Tax reforms eased for small business

The government is easing the terms of one aspect of its tax crackdown announced earlier this fall — the legislation that would force small businesses to pay 22% VAT after their revenue passes 10 million rubles (about $125,000).

• Prime Minister Mikhail Mishustin announced the easing of the reforms at a government meeting, but did not go as far as a complete U-turn. Instead, the annual revenue threshold will be reduced gradually. First to 20 million rubles in 2026, then 15 million in 2027 and 10 million in 2028.
• There was no discussion of the initial reform within the business community, which greeted it with outrage. The changes were so drastic that only firms like small hair salons or street kiosks would have remained eligible to carry on paying a flat tax rate of 6% of their total income — a much simpler process. The rest would have faced the complex and expensive requirement of becoming VAT payers. A simple calculation shows that the tax burden they would have faced could have more than doubled. Paying VAT requires submitting quarterly tax returns, maintaining sales and purchase ledgers, issuing invoices and payment upon shipment. In other words, business administration costs will increase sharply.
• The 10-million-ruble threshold would subject about 500,000 of the current 3.5 million companies that operate under the simplified tax system to VAT. Some businesses were planning to close due to the complexity of the new arrangements, while others planned to hike prices by 5-10% to cover costs.
• The reforms were intended to raise an extra 200 billion rubles for the budget and combat a common evasion scheme whereby entrepreneurs broke up a larger company into smaller firms that all separately qualified for the simpler system.
• But the gradual reduction of the threshold does not solve the problem, it merely draws out the blow for small businesses. Hundreds of thousands of small companies will still be affected, from hairdressers to shops. For consumers, this will mean price rises, for entrepreneurs it means more red tape and the temptation to even further split up businesses to keep them under the new threshold.

Why the world should care

With their latest tax hikes (1, 2) the authorities clearly indicated that they were willing to sacrifice small and high-tech businesses for the sake of military spending. Yet these are the very sectors where, for many years, the government has spent much time and money trying to stimulate growth.