On Friday, President Vladimir Putin enacted a significant tax reform that will increase Russia’s value-added tax (VAT) from 20% to 22% starting next year. This initiative is intended to address the fiscal shortfall resulting from rising military spending coupled with declining oil and gas revenues due to Western sanctions.

Additionally, more small enterprises will be incorporated into the tax framework due to further modifications. The threshold for annual revenue that mandates VAT payment will be reduced from 60 million rubles ($732,000) to 10 million rubles ($122,000).

Surveys indicate that businesses plan to pass the increased tax burden directly onto consumers, who have already been facing financial pressure from high inflation linked to wartime expenditures.

Economists, including those from the Finance Ministry, predict a slight increase in inflation as the VAT increase comes into effect next year.

VAT is a crucial source of government revenue, contributing 11.5 trillion rubles ($148 billion) from January to October, which accounts for more than 38% of the total federal income.

Under the new regulations, certain food items, medications, and children’s products will remain at a reduced VAT rate of 10%. However, specific dairy products made with milk-fat substitutes, such as processed cheeses and spreads, will now be taxed at the full 22% rate.

It’s worth noting that Russia last raised the VAT in 2019, increasing it from 18% to 20%.