The fiscal impact of the proposed VAT changes may not meet budget expectations

The increase in the tax burden in 2026 has sparked lively debate, particularly regarding the increase in the VAT rate to 22% and the reduction in the threshold for the simplified tax system and patent from January 1, 2026. However, the forecast for VAT revenue growth, estimated by the Russian Ministry of Finance at Rb 1.4 trillion, may not be achieved in our view, as it assumes not only the best possible dynamics of key macroeconomic variables, but also steady growth in VAT collection. According to our estimates, there is a risk of a shortfall of approximately Rb 0.6 trillion in VAT revenue in 2026. Moreover, this measure can lead to a reduction in other budget revenues in 2026 due to the negative consequences of a decline in the purchasing power of business and household income, including a reduction in income tax revenues to the federal and regional budgets, as well as insurance contributions and personal income tax due to a reduction in the wage fund, and a slowdown in the pace of key rate cuts by the Central Bank, which will increase the cost of new borrowing for the Russian Ministry of Finance.