The invasion of Ukraine has undoubtedly strained Russia’s economy, with government spending surpassing revenue due to sanctions disrupting energy sales to Europe.
As a means of weathering the economic storm, Russia’s Ministry of Finance has proposed new tax thresholds for top earners and a hike in corporation tax, scrambling for additional revenue to fund its invasion of Ukraine.
Since Moscow ordered its troops into Ukraine in February 2022, government spending has exceeded revenue by tens of billions of dollars.
Russian President Vladimir Putin suggested the country would raise taxes for companies and wealthy individuals shortly before he secured a fifth term in office in March, marking a further step away from the flat rate of income tax that was the cornerstone of his economic policy during his first two decades in power.
The proposal is likely to gain parliament’s approval and subsequently a signoff by Putin.
The amendments are expected to raise about 2.6 trillion rubles ($29bn) a year, according to the Finance Ministry calculations.
“The changes are aimed at building a fair and balanced tax system,” stated Minister of Finance, Anton Siluanov, adding that the extra funds would bolster Russia’s “economic wellbeing.”
However, while the intention may be to create a fairer and more balanced tax system, the timing and motivation behind these adjustments reflect the country’s desperate need for revenue amidst the ongoing conflict in Ukraine.
The proposed amendments would come into force from 2025.
Currently, income tax is 13 percent for the majority of Russians, with some higher earners paying a rate of 15 percent.
Under the proposed amendments, the 15 percent rate would apply for annual incomes between 2.4 and 5 million roubles ($27,000-56,000), with three higher bands – of 18 percent, 20 percent, and 22 percent – further up the income ladder. The top rate would apply to earnings exceeding 50 million roubles ($560,000).
Siluanov noted that the changes would affect 2 million people and there would be rebates for families of two or more children.
Furthermore, the corporate tax will rise to 25 percent from 20 percent.
According to a Rusian news agency, this will add 1.6 trillion roubles ($18b) to the budget in 2025 and 11.1 trillion roubles ($125.3bn) by 2030.
The ministry justified the increase in corporate tax rates by stating that the share of profitable companies in the economy was growing.
Moreover, the Finance Ministry said that soldiers fighting in Ukraine would be offered exceptions from the tax regime.
Russia To Take Advantage Of U.S Sanctions
Meanwhile, Russian Ambassador to Washington, Anatoly Antonov said that Russia will take advantage of US restrictions to boost import substitution efforts.
This came as he commented on the White House’s statements about a potential trade embargo against Moscow.
White House Deputy National Security Adviser For International Economics, Daleep Singh said on Tuesday, May 28, 2024, that the US might eventually impose a trade embargo on Russian goods.
“We, on the other hand, are using the situation as an additional impetus for import substitution, especially in key industries,” Antonov told reporters.
According to the envoy, Russia continues to build up its “socio-economic and industrial potential.”
“The figures on the growth of the national market speak for themselves,” Antonov noted.
“No embargo or sanctions will break the Russian economy. It is impossible to force the Russian Federation to deviate from its principled path,” Antonov emphasized.
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