Which VAT Rate Should Simplified Tax System (STS) Taxpayers Apply Under the Recent Changes?

The State Duma has adopted in the third reading draft law No. 1026190-8 aimed at reforming the tax system. The changes will also affect taxpayers using the Simplified Tax System (STS). The draft law provides for a significant reduction of the VAT exemption threshold starting in 2026.

Initially, it was proposed to set the VAT exemption threshold at 10 million RUB as early as 2026. Eventually, lawmakers opted for a gradual transition.

Who Will Keep the VAT Exemption

STS taxpayers will not pay VAT if:

• their income in 2025 does not exceed 20 million RUB (threshold valid for 2026);
• their income in 2026 and during 2027 does not exceed 15 million RUB;
• their income in 2027 and during 2028 does not exceed 10 million RUB.

1. Applying the Standard VAT Rate with Input VAT Deduction

From January 1, 2026, the standard VAT rate is planned to increase from 20% to 22%. For those applying the reduced 10% rate, nothing changes.

2. Applying a Reduced VAT Rate (5% or 7%) Without Input VAT Deduction

STS taxpayers may apply reduced rates under certain conditions:

• 5% — if annual income does not exceed 250 million RUB or the VAT exemption is lost during the year;
• 7% — if annual income does not exceed 450 million RUB or the right to apply 5% is lost.

The Ministry of Finance clarified (letter No. 03-07-11/70950 of 22.07.2025) that the 7% rate may be applied even if the taxpayer still qualifies for 5%.

Under the current rules, switching away from a reduced rate is allowed only after 12 consecutive tax periods, but the draft law allows switching within the first year.

How to Choose the VAT Rate

Taxpayers should analyze their cost structure:

• If expenses are mainly goods and materials, it is more beneficial to apply the 22% rate and deduct input VAT.
• If most expenses are wages and insurance contributions, applying a reduced rate without VAT deduction may be advantageous.