The Ministry of Finance vs. Small Business: Who Will Be Buried by Tax Reform?

The basic VAT rate in Russia is expected to increase from 20% to 22% starting next year. The threshold for applying the simplified tax system will be reduced sixfold: from 60 million to 10 million rubles.

The changes will affect everyone: Russians will face higher prices for goods and services, and small businesses will face a sharp increase in tax and administrative burdens. Those for whom a turnover of 10 million rubles a year is not a successful business, but a balancing act on the brink of survival, are at risk.

While VAT is currently reserved for "mature" companies, starting next year, a huge number of micro-businesses—bakeries, hair salons, and workshops—will fall under the general taxation system. Anyone with daily revenue exceeding 27,500 rubles will be subject to the general taxation system.

"Even if such companies choose the simplified 5% VAT payment option without the right to deduct input VAT, they will still have to maintain complex accounting," says Vera Kononova , PhD, Deputy Head of the Analytical Research Department at the Institute for Comprehensive Strategic Studies.

For many small towns and villages, this will be a critical blow: businesses that relied on the reduced tax burden will simply leave the market.

The Ministry of Finance's initiative will also hit small IT service companies earning 10-30 million rubles a year, says Alexey Postrigailo, senior partner at IT integrator Ensign.

"The most unpleasant effect is long-term contracts signed without VAT. In 2026, the tax will have to be paid, but it's not included in the budget. The margin goes into the red," he explains.

Such companies need a transition period to prevent taxes on old contracts from retroactively consuming all profits. Otherwise, the market is expected to see the demise of micro-studios and increased unemployment among entry-level IT specialists. For them, wages and taxes will be higher than clients are willing to pay in a stagnant economy, the expert notes.

Reducing the simplified tax system threshold by six times is a rather radical measure, according to Oleg Abelev , PhD, head of the analytical department at the investment company Rikom-Trust. For small businesses, revenue of 800,000 rubles per month is not success, but rather the "basis of survival." This is especially true in the service and retail sectors, where margins are small.

If the Ministry of Finance's initiative is supported, small businesses will be forced to transition to the general tax system starting next year. This means:

"Switching from the simplified tax system to the standard one isn't just an additional tax. It complicates paperwork; you have to issue invoices, keep records, and file quarterly VAT returns. You have to introduce accounting and hire a qualified accountant. These are additional expenses," he commented to Novye Izvestia.

For companies with low margins (10-15%), these costs can eat up almost all profits. The result is a growing number of closures and a new wave of entrepreneurs going underground, paying cash without a cash register.

It is noteworthy that, when initiating the reduction of the simplified tax system threshold to 10 million, the Ministry of Finance justified this by the fight “against business fragmentation schemes.”

"Lowering the threshold to 10 million rubles will more effectively combat fragmentation and ensure a smooth transition to general taxation conditions for growing businesses," the agency said in a statement .

Analysts, however, saw exactly the opposite effect in this measure.

"This will encourage fragmentation. If the threshold is set at 10 million, businesses will be split into several sole proprietors or LLCs. That is, instead of one company with 30 million in revenue, there will be three with 10 million in revenue. This initiative could backfire: instead of increasing collections, it will decrease them," Oleg Abelev believes.

The feasibility of tax reform remains highly questionable, according to Vera Kononova. She notes that Russia's budget deficit is not catastrophic. At 14.4% of GDP by the end of 2024, public debt remains modest by global standards. Instead of raising taxes, borrowing or lowering the key interest rate could be an option, the expert emphasizes.

"This would reduce the cost of borrowing for the budget itself and reduce the need for interest rate subsidies for priority categories of borrowers, for which more than 1.7 trillion rubles are planned to be allocated in 2025," she notes.

Abandoning the excessively high exchange rate of the national currency is another possible measure. Economists estimate that even a one-ruble appreciation would result in a loss of 150-160 billion rubles in federal budget revenue.