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Russia weighs up its biggest tax shake-up in almost 25 years to finance Ukraine war

Signs of Russia’s so-called special military operation are everywhere in Moscow, from roadside recruitment adverts to Z-themed souvenirs.

Now there is another example – a proposed tax hike, that amounts to the biggest shake-up of the Russian tax system in a quarter of a century.

As the war in Ukraine continues to drain the Kremlin’s coffers, the government is scrambling to find new ways to finance it.

Read more: Ukraine-Russia war latest updates

Pro-Russian 'Z' patches on display at a store in Moscow
View of a store in Moscow selling pro-Russia and pro-war merchandise

Its answer is a new progressive income tax rate that will target the wealthy, as well as a rise in corporation tax.

The proposals were first mooted by Russian president Vladimir Putin on the campaign trail ahead of his re-election in March. Analysts say he was forced to act.

Defence spending has surpassed 8% of GDP, and is sucking up nearly a third of the state budget this year.

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“It seems like the tax reform is a tool to move the economy from butter toward guns,” said Alexander Kolyandr, a non-resident senior fellow at the Centre for European Policy Analysis.

“The government is no longer concerned about you eating well, but rather about you producing more guns.”

The reforms mark a dramatic departure from the Russian leader’s previous tax policies.

Pic: AP
Image:
Pic: AP

In 2001, shortly after assuming office, he introduced a flat rate of just 13% that was applied universally, and most Russians have been paying the same rate ever since.

The move simplified a previously complicated tax regime which few adhered to and it successfully boosted revenues – and his popularity – as a result.

A higher rate of 15% was established in 2021 for those earning more than five million roubles (around £43,500).

Now the finance ministry wants to lower the threshold for the 15% rate, so it applies to annual incomes from 2.4 (around £20,800) to five million roubles, and introduce more bands above.

Incomes between five and 20 million roubles (around £43,500 to £174,000) will be taxed at 18%, those between 20-50 million roubles (around £174,000 to £434,000) at 20%, and anything over 50 million roubles at 22%.

The proposals will also see corporation tax increase from 20% to 25%.

Pro-Russian artwork in Moscow, featuring the 'Z' icon used throughout the war in Ukraine

If adopted by the Russian parliament, the changes will come into force next year and generate 2.6 trillion roubles (£22.5bn) in budget revenues, the government said.

“For the past two years, the Russian economy has been running on state spending,” Mr Kolyandr said.

“It cannot last forever, because in effect, it’s mortgaging your future.

“To get this mortgage more appealing, you need more money.”

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According to the Kremlin, 3% of the workforce will be affected by the changes, which it insists are fair.

It says the reforms should solve national problems, reduce inequality and help develop Russia’s regions.

But the official line has been met with some scepticism on the streets of Moscow.

“I think they don’t have enough money for the special military operation, that’s why they’re introducing it,” Sergei told Sky News in Moscow.

Ulyana agreed, adding: “I don’t think it’s fair to tax more from 200,000 [roubles a month].

“This will just affect people who work a lot.”

In reality, everyone here is affected by Russia’s current path. This is merely the latest impact, and it will be felt in people’s pockets.

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