Within affordability: Russia has proposed indexing personal income tax thresholds
The Russian Union of Industrialists and Entrepreneurs (RUIE) has proposed that the income thresholds for the progressive personal income tax scale should be indexed annually in line with the inflation rate in the Russian Federation. Such a measure is contained in the resolution of the Tax Forum, which is being held as part of the Russian Business Week. How it will affect the tax system and whether it can provoke the growth of "gray" salaries, "Izvestia" investigated.
Tax burden
Every year, the Ministry of Economic Development establishes a deflator index to account for annual inflation in some taxes, fees and mandatory payments. Its size depends on inflation, and its value differs by industry.
"Provide a mechanism for annual indexation of thresholds at which increased personal income tax rates from 15 to 22% begin to be levied, focusing on the dynamics of the deflator index," the RSPP resolution says.
The Union also proposed to expand the application of the federal investment tax deduction (FITD): to increase the limit of allocated funds from 100 billion to 500 billion rubles, to increase the sectoral coverage of the FITD, as well as the size of the deduction from 3 to 10%. In addition, RSPP considers it necessary to start working on the introduction of a family taxation mechanism, linking tax benefits to the number of children.
The RSPP's proposal on indexation is quite logical, but most likely the chances that it will be accepted now are small, Anton Tabakh, chief economist of the Expert RA rating agency, told Izvestia.
- Slow indexation or its absence is a good way to not too blatantly increase the tax burden, which the state is unlikely to give up. The amount of deduction for real estate has not been increased since 2009, and developers have huge lobbying opportunities and losses from this deduction are insignificant. Why adjust the progression that has just been introduced? - he notes.
Another plan of the RUIE - the calculation of personal income tax at the household level - will probably be implemented, but not immediately, the expert believes.
- "Tax cacheback", introduced from this year for non-wealthy families, is the first step towards a fairer taxation of households rather than employees, - Anton Tabakh noted.
Changing revenues
The annual indexation of income thresholds for the progressive personal income tax scale taking into account inflation may lead to a decrease in tax revenues, Igor Rastorguev, a leading analyst at AMarkets, told Izvestia.
- This is due to the fact that the boundaries of the rates will increase and part of the income, which was previously subject to higher tax, will remain within the lower rates," he explained.
In addition, he said, many companies have now switched to "white" salaries, as various tax breaks introduced back during the pandemic are in effect.
- However, if the tax burden starts to grow again, businesses may look for ways to optimize costs, which may provoke the growth of "gray" schemes of salary payment. As a result, the state budget may not receive a part of taxes, and the effect of indexation will be the opposite of what was expected," the expert emphasized.
The progressive personal income tax scale was extended from 2025. The rate for income up to Br2.4 million remains the same - 1%; up to Br5 million - 15%. Income from Br5 million to Br20 million is taxed at the rate of 18%, up to Br50 million - 20%, and income over Br50 million - at the rate of 22%.
At the same time, the increased rates do not apply to all income, but only to the part exceeding the threshold levels, which are specified in the law and do not provide for indexation.
"Izvestia" sent inquiries to the Federal Tax Service, the Ministry of Taxes and the Russian Union of Industrialists and Entrepreneurs, but at the time of publication no answers had been received.
Inflationary growth
The transition to annual indexation of income thresholds, upon reaching which the personal income tax rate increases, should be regarded as a relevant and correct step in the development of income taxation in Russia, says Vladimir Gromov, a senior researcher at the Tax Policy Research Laboratory of the IPEI of the Presidential Academy.
- It should be taken into account that the task of the progressive scale is to distribute the tax burden in accordance with the level of wealth of individuals, the indicator of which in this case is personal income. The growth of this income can be real and inflationary. Inflationary growth does not make a taxpayer richer, so higher tax rates should not be applied to him," the expert told Izvestia.
At the same time, he believes that fixing the thresholds at the current rate of inflation creates risks of lowering the fiscal ceiling, i.e. increasing the share of citizens who, without becoming richer, will have to pay more money to the budget from nominally increasing but inflation-absorbed income.
Indexation is designed to protect the rights of citizens whose incomes are close to the thresholds of increased tax rates from excessive taxation, reminded Vladimir Gromov.
- Therefore, it does not carry any threats to the interests of the budget system, but will avoid the dis-synchronization of the size of tax exemptions with the real value of earnings. Moreover, the formation of a progressive scale on the values of income, adequate to the current price level, will reduce employers' motives for concealing the actual size of wages and in the future will help to stabilize the process of legalization of the tax base, - he said.
Now in conditions of relatively high inflation in 2025-2026 years under increased taxation may fall representatives of professions that are difficult to attribute to high-paid, said "Izvestia" head of the Department of Accounting, Audit and Taxation GUU, Doctor of Economics Marina Karp. The application of the index-deflator to the progressive taxation scale will lead to an increase in income thresholds at which higher personal income tax rates are applied.
- Thus, the tax burden of citizens will not grow because of the increase in income due to inflation. For example, according to Rosstat, inflation in Russia at the end of 2024 amounted to 9.52%. So, the thresholds of personal income tax scale will look as follows when applying such index-deflator: up to 2.738 million rubles - 13%, from 2.738 million to 5.476 million rubles - 15%, from 5.476 million to 21.904 million rubles - 18%, from 21.904 million to 54.760 million rubles - 20%, and income over 54.760 million rubles - 22%, - said the expert.
The Central Bank of Russia raised the inflation forecast for the current year to 7-8% from 4.5-5%. The inflation forecast from the Ministry of Economic Development for 2025 amounted to 4.5%.
When indexing the threshold amounts, only the nominal value of the tax will increase, Evgeny Mironyuk, stock market expert at BKS Investment World, told Izvestia. The real amount of revenues (at PPP, i.e. taking into account inflation) will remain at the same level. The measure is aimed, among other things, at reducing payments of salaries under "gray" schemes (bypassing taxation).
- The lack of indexation of the threshold will have a negative impact on the real incomes of citizens and organizations. The average salary, for example, in Moscow will exceed the threshold of Br200 thousand (Br2.4 million a year) in a few years. It will be followed by the median salary, which will mean that the majority of employees of organizations will pay tax at the rate of 15%. This will significantly increase the share of organizations trying to illegally avoid paying part of the tax paid by the employer for the employee," he said.
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