Russia plans tax hikes as costs of war in Ukraine mount

Updated

May 29, 2024, 04:35 AM

Published

May 29, 2024, 04:35 AM

MOSCOW – Russia is planning to raise taxes on high earners and businesses, the finance ministry said on May 28, as it scrambles for additional revenue to fund its invasion of Ukraine.

Government spending has outrun revenue by tens of billions of dollars since Moscow ordered troops into Ukraine in February 2022, pushing the country into rare annual budget deficits.

The loss of lucrative energy sales to Europe combined with a huge increase in military outlay has forced Russia to dip into its sovereign wealth fund and borrow from state-owned banks to cover the shortfall over the last two years.

The finance ministry proposed on May 28 new higher-tax thresholds for top earners and a hike in corporation tax to 25 per cent from 20 per cent.

The increases would raise around 2.6 trillion roubles (S$39 billion) a year, the Interfax news agency reported, citing finance ministry calculations.

“The changes are aimed at building a fair and balanced tax system,” Finance Minister Anton Siluanov said, in a statement, adding that the extra funds would bolster Russia’s “economic well-being”.

The proposals move Russia further away from the flat rate of income tax that was the cornerstone of President Vladimir Putin’s domestic economic policy during his first two decades in power.

That system, in place since 2001, set income tax at 13 per cent and was credited with boosting the state’s coffers, stamping out tax evasion and curtailing a thriving black market.

In 2021, the government started levying a 15 per cent tax on annual earnings above five million roubles, in its first major income tax change.

Under proposals outlined on May 28, the earnings threshold for the 15 per cent rate would be cut to 2.4 million roubles, and three higher bands – of 18 per cent, 20 per cent and 22 per cent – would be introduced further up the income ladder.

Soldiers fighting in Ukraine would be offered exceptions, the finance ministry said, adding that the changes could be approved by parliament this year and be in force for 2025.

Russia ran a combined budget deficit of around 6.5 trillion roubles in 2022 and 2023.

It has budgeted for a shortfall of 1.6 trillion roubles in 2024, equivalent to around 0.9 per cent of GDP. AFP

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