On taxation of small business in the context of integration of new regions

Pianova Marina Vladimirovna PhD in Economics Senior Researcher; Institute for Research on Socio-Economic Transformations and Financial Policy; Financial University under the Government of the Russian Federation 49 Leningradsky Prospekt str., Moscow, 125993, Russia marinapyanova@mail.ru Other publications by this author

Introduction

The current process of integrating new territories into a single socio-economic space of Russia is hampered not only by differences in the level of development of the regions, but also by serious destruction of socio-economic and transport infrastructure, the restoration of which requires additional financial resources. At the same time, 85% of the revenues of the new regions of the Russian Federation are generated from gratuitous receipts from the federal budget^[1], which are non-targeted inter-budgetary transfers, which allows regional authorities to independently determine priorities and proportions in the distribution of financial resources. According to the Ministry of Finance of the Russian Federation, the indices of tax potential in 2024 in these subjects are very low (Fig. 1).

Source: compiled by the author according to the data of the Ministry of Finance of the Russian Federation^[2]

Fig. 1. Characteristics of budget security for 2024

The data in Fig. 1 indicate that the budgetary provision of the new territories is significantly lower than similar indicators for other subjects of the Russian Federation that are part of the Southern Federal District. Therefore, the formation of own sources of financing budget expenditures of Southwestern regions is an important condition for the integration of these regions into a single socio-economic space of Russia.

The full-fledged integration of the new regions is focused on the implementation of the geopolitical strategy of the Russian Federation, the main directions of which are fixed in the Concept of Foreign Policy of the Russian Federation^[3]. In this regard, putting new regions on a sustainable trajectory of socio-economic development is a multifaceted task, the solution of which will require not only the mobilization of resources from the state, but also the creation of favorable conditions for all participants in economic processes. Therefore, when developing measures to facilitate the implementation of the fiscal function of taxes in new regions, the balance between the effective use of tax potential and the tax burden of taxpayers should be taken into account. The need to maintain such a balance is reinforced by the experience of fiscal integration of the Republic of Crimea and Sevastopol. At the initial stage, the regions remained deeply subsidized, the share of transfers from the federal budget was 75% ^[1]. Integration into the tax system of the Russian Federation has led to an increase in the tax burden on taxpayers, due to the fact that before 2014, in accordance with the legislation of Ukraine, the tax burden was lower. To prevent an increase in the tax burden, a system of measures was taken, including exemption from property taxes, reduced regional tax rates for the transition period, and the creation of a free economic zone^[4]. The measures taken contributed to stimulating the economy of the region by reducing the tax burden and creating attractive business conditions, but at the same time could not contribute to the formation of the region's own budget sources at the initial stage.

An important factor in the development of the region's economy, which allows solving many socio-economic problems, is small and medium-sized enterprises. The purpose of the study is to assess the measures of tax support for small businesses in the new territories of the Russian Federation from the standpoint of maintaining the level of tax burden.

Materials and methods

An analysis of the statistical tax reporting forms of the Federal Tax Service of Russia suggests that tax revenues from SMEs are a stable source of income for the budget system - the share of this sector of the economy in the formation of the country's budget amounted to about 3% in 2023, in absolute terms, its tax payments exceeded 1.03 trillion rubles.^[5] A qualitative assessment of the tax potential of small businesses in the southwestern territories is hampered by the short period of stay of these entities under the jurisdiction of the Russian Federation, and as a result, the limited availability of detailed statistical data on regional development indicators and tax revenues to the budget system. A retrospective analysis of the indicators of the number of taxpayers – SMEs allowed us to identify certain dynamics (Table 1).

Table 1 – Dynamics of the number of SMEs

Source: compiled by the author according to the Unified Register of Small and Medium-sized Businesses^[6]

As the data in Table 1 show, in 2024, compared with 2023, the increase in the number of taxpayers – legal entities in the new regions is many times ahead of the dynamics in the country: the growth rate of the indicator as a whole as of 08/10/2024 is negative and amounts to 4.15%, whereas in the new subjects it exceeds 60%. Similar conclusions can be drawn regarding the number of taxpayers – individual entrepreneurs registered in the above-mentioned territories: the increase in the number of entrepreneurs in the new regions also exceeds the dynamics in the Russian Federation: the growth rate of the indicator in the whole country as of 08/10/2024 amounted to 1.03%, in the new regions – 7.14%. In 2023, compared with 2022, the growth rate was much higher, which is largely due to the massive transition of regional business into the legal field of the Russian Federation, however, in terms of the number of taxpayers, the southwestern territories are still ahead of many regions. The regional structure of SMEs has no specific features, as in the whole country, the absolute majority – 96-98% of registered entities belong to micro-business.

Despite the high ability to adapt to adverse external influences, small business is the most vulnerable sector of the economy, as it does not have the reserves of resources inherent in large business. Entrepreneurial activity in the new territories of the Russian Federation, in addition to unprecedented sanctions pressure ^[2], is high-risk, complicated by significant destruction of socio-economic infrastructure and military operations carried out in these territories.

The need to develop effective tools to support small and medium-sized businesses in the economy is emphasized in the works of many authors ^[3-6]. One of these tools is the possibility of applying special tax regimes, which contributes to a significant reduction in the tax burden ^[7-10]. According to the Federal Tax Service of Russia, the tax burden of a taxpayer of the simplified taxation system (USN) is 2.5-3 times lower than under the general taxation system (OSN)^[7].

Since 01.01.2023, Russian legislation on taxes and fees has been applied in the territories of the DPR, LPR, Zaporizhia and Kherson regions on the basis of Federal Constitutional Laws No. 5-FKZ^[8], No. 6-FKZ^[9], No. 7-FKZ^[10], No. 8-FKZ^[11] dated 04.10.2022 in general I'm fine. The powers of the subjects of the Russian Federation to conduct an independent tax policy in relation to special tax regimes are defined by the Tax Code:

- the introduction of a regime in the territory of the relevant region;

- determination of the types of activities subject to the special ^[12] tax regime;

- differentiation of tax rates;

- establishment of tax holidays.

In modern economic conditions, the issues of development and economic growth of the subjects of the Russian Federation are largely determined by the ongoing regional tax policy ^[11]. Therefore, various regulatory legal acts have established the specifics of the application of tax legislation in terms of taxation of small businesses (Table 2).

Based on the results of the review of tax norms shown in table 2, it is assumed that for SMEs, tax conditions in 2024 will be significantly milder than in the Russian Federation as a whole. For comparison, the Republic of Tyva was chosen - a subject with a similar level of subsidization - more than 40%. In this group, in addition to the new territories, there are the Republic of Tyva, the Republic of Dagestan, the Republic of Ingushetia, and the Chechen Republic. The following assumptions were made for comparative calculations (Table 3):

- for the analysis, taxpayers of the USN were selected, using "income reduced by the amount of expenses" as an object;

- the amount of income of taxpayers of this group is accepted in the amount of 120 million rubles, as the maximum amount of income of a microenterprise ^[13], since SMEs in the analyzed subjects are mainly represented by microbusiness;

- expenses are accepted in the amount of 70% of income, since with a lower share of expenses, the use of STS with the object "income reduced by the amount of expenses" becomes economically unprofitable;

- the calculation uses data on the average number of employees according to the Unified Register of Small and Medium–sized Businesses in 2024 - 5 people;

- Rosstat data on the amounts of average wages in the Russian Federation for the 1st quarter of 2024 in the amount of 80,582 rubles were used.;

- the minimum wage from January 1, 2024 is set at 19,242 rubles.

Table 2 - Features of the application of special tax regimes in new regions of the Russian Federation

Source: compiled by the author

Table 3 – Comparative characteristics of the tax burden of taxpayers of the USN in 2024

Source: calculated by the author

According to Table 3, the estimated tax burden of an SME entity in the new regions in 2024 is significantly lower than in comparable regions of the Russian Federation - by 1.7 – 2.4 times. This difference is ensured by the reduced rates of the STS established by regional laws. Similar conclusions can be drawn regarding the workload of individual entrepreneurs using the STS. Here, the difference in the fiscal burden on insurance premiums is more indicative: for new entities, the contribution burden in 2024 is 20% lower than the average in Russia, all other things being equal. The difference is due to the reduced rate of insurance premiums established for sole proprietors who do not make payments to employees. It is obvious that under the current tax legislation, the conditions of small business activity in the territories of southwestern subjects are not only high-risk, but also really preferential and sufficient for conducting an independent tax policy in the region.

However, from January 1, 2025, changes in tax legislation introduced by Federal Law No. 176-FZ dated 07/12/2024^[14] and directly affecting the interests of taxpayers of the USN will come into force:

- an increase in the income limit for the use of the STS to 450 million rubles.;

- increase in the residual value of fixed assets to 200 million rubles.;

- increase in the average number of employees to 130 people;

- cancellation of the increased tax rates 8 and 20%;

- automatic exemption from VAT obligations for USN payers whose income does not exceed 60 million rubles.;

- provision of alternative VAT payment options by STS payers: at base rates of 10 and 20% with the possibility of applying tax deductions, or at reduced rates of 5 and 7%, depending on the amount of income without the right to deductions.

According to the Interfax news agency, "raising the thresholds for the use of the STS, as well as recognizing taxpayers using the simplified tax system as VAT payers, will give the federal budget approximately 473 billion rubles. VAT, and the budgets of the regions - about 258 billion rubles. The losses of regional budgets for income tax will amount to 324 billion rubles, for corporate property tax - 58 billion rubles per year (the excess of losses over additional income is compensated by the federal budget). Collectively, this measure will provide additional revenues in the amount of about 2.5 trillion rubles to the budget over a 6-year horizon, the Ministry of Finance calculated"^[15].

Let's estimate how the tax burden of the USN taxpayer will change in 2025 compared to 2024. The data used earlier are used for calculations and assumptions are made (Table 4).

Table 4 – Comparative characteristics of the tax burden of USN taxpayers in 2025

Source: calculated by the author

According to the calculations shown in Tables 3 and 4, it is possible to draw conclusions about a sharp increase in the tax burden of taxpayers of the STS in 2025 compared to 2024 due to the changes made to the tax legislation. In particular, when choosing to pay VAT at reduced rates without applying tax deductions, on average in Russia, the burden of taxpayers will increase by an average of 2.5 times, and when paying VAT at basic rates – by 2.6 times. Changes in tax legislation in the part of the tax system for small businesses operating in the Donetsk and Lugansk People's Republics, in the Zaporozhye and Kherson regions will be especially sensitive – here the tax burden will increase by 4.8 – 5 times.

Results and their discussion

In the context of the integration processes taking place in Russia, it is advisable to consider the changes made, firstly, from the standpoint of the fiscal interests of the state, since tax revenues are the main source of financing mandatory budget expenditures and financing various government programs, including those aimed at the restoration and development of new territories. Secondly, an assessment of "losses" is needed, that is, an increase in the tax burden for all taxpayers, including those engaged in entrepreneurial activities in high-risk conditions (Fig. 2).

Source: compiled by the author

Fig. 2. Matrix of benefits and losses from changes in tax legislation

According to Figure 1, the changes made to the Tax Code cannot be assessed as unambiguously positive or negative for both sides of the tax relationship:

- an increase in income limits significantly expands the circle of persons entitled to use the STS and helps to reduce the risks of business fragmentation ^[12], while accompanied by falling budget revenues associated with the exemption of this circle of persons from duties to pay corporate income tax, personal income tax, etc.;

- changes in the marginal value of the residual value of fixed assets indirectly stimulate investment and expand the possibilities of entrepreneurial activity in the field of production, but are also accompanied by falling revenues of the budget system due to the use of the STS by a wider range of taxpayers. According to the statistical tax reporting forms of the Federal Tax Service of Russia, in 2023 about 15% of taxpayers applying special tax regimes conducted business activities in capital–intensive industries - construction, manufacturing, etc. Accordingly, for this group of taxpayers, an increase in the marginal value of the residual value of property will have a stimulating effect;

- an increase in the number of employees, according to the author, will not have any noticeable effect, since this indicator is set at an excessively high level. According to the Unified Register of SMEs, in 2022-2023, the number of employees in organizations averaged 5-6 people, for entrepreneurs – less than 1. Therefore, a decrease in the number of employees would be economically justified ^[13];

- the abolition of the increased tax rates of the STS will contribute to maintaining the level of the payer's tax burden, but is accompanied by budget losses;

- exemption from VAT for taxpayers whose income does not exceed 60 million rubles. It helps to maintain the tax burden for microbusiness, while it can provoke tax evasion by splitting up the business;

- the establishment of the obligation to pay VAT is aimed at compensating for the shortfall in budget revenues from the expansion of limits for the purposes of applying the STS, and is accompanied by a significant increase in the tax and administrative burden of the taxpayer, however, in the case of choosing to pay VAT at base rates, it can also bring certain benefits for him – the possibility of mutually beneficial partnership with large businesses;

- the establishment of the obligation of the VAT taxpayer in the case of choosing to pay tax at reduced rates of 5 or 7%, of course, can have a positive fiscal effect, but for business it will only mean an increase in the tax burden, complication and increase in the cost of accounting.

Despite the short period of existence of the new regions of Russia and the incomplete processes of their integration, a certain number of publications have appeared in the scientific literature on various aspects of the restoration and development of the economic potential of these regions. Thus, in the studies of Suschego S. Ya., Polovyan A.V., Lepa R. N., Grinevskaya S. N., the drivers of development in basic industries were identified: industry, construction, transport, recreational and tourism ^{[14, 15]}. Druzhinin A.G. notes the need to modernize the transport infrastructure based on the use of the long sea coast ^[16]. Some authors consider it promising to create a free port in Berdyansk, a single tourist and recreational complex ^[17], and integration into a single space of the agro-industrial complex ^[18]. We note the almost complete absence of publications devoted to the study of the dynamics of small business development and the development of measures to support it with taxes.

As of 1.08.2024, according to the Federal Tax Service of Russia on state registration of legal entities and individual entrepreneurs^[16], a total of 140,681 taxpayers were registered in the territories of southwestern subjects, of which 109,477 subjects belong to small businesses. That is, from January 1, 2025, we can expect an increase in the tax burden by almost 5 times for 78% of taxpayers who operate in conditions of military operations, destroyed infrastructure, increased banking tariffs, etc.

Obviously, in order to prevent a significant increase in the tax burden and preserve small businesses in the new territories of the Russian Federation, it is advisable to put the fiscal interests of the state on the back burner, and formulate a number of tax incentive measures for the period up to 2028. Similar temporary norms for taxpayers of southwestern territories are already applied in Russian legislation. For example, in accordance with Parts 6, 7 of Article 5 of Federal Law No. 564-FZ dated 12/28/2022 "On Amendments to Article 4 of Part One and Part Two of the Tax Code of the Russian Federation and Certain Legislative Acts of the Russian Federation" in new territories, regional and local taxes can be established and put into effect from January 1, 2024 of the year.

Taxation of the property of individuals has not yet been carried out. Transport tax, corporate property tax and land tax are already in effect in these regions of Russia, taking into account certain features:

- the regional tax base of the transport tax has not been fully formed – owners are required to register vehicles by January 1, 2026^[17];

- taxation of the property of organizations is applied in a limited manner due to the incompleteness of the state cadastral valuation of real estate objects at the moment. According to the provisions of the constitutional laws on the formation of new subjects in the Russian Federation on the territory of the DPR, LPR, Zaporizhia region and Kherson region, it is planned to conduct a state cadastral assessment of real estate and land plots and approve its results before January 1, 2028;

- the specifics of calculating the land tax have been determined until the state cadastral assessment is completed and its results are approved. In particular, the provisions of paragraph 9 of Article 391 of the Tax Code establish the procedure for determining the tax base in respect of land plots located in the territories of the specified subjects of the Russian Federation on the basis of the normative price of land established by the authorized executive authorities of the DPR, LPR, Zaporizhia region and Kherson region.

Conclusion

Thus, the expediency of introducing temporary tax norms to maintain the level of the tax burden of taxpayers in order to integrate new territories into the socio-economic space of Russia painlessly is traced.:

- preservation of exemption from the duties of VAT taxpayers for organizations and individual entrepreneurs applying the simplified taxation system and operating in the territories of the Donetsk People's Republic, Luhansk People's Republic, Zaporizhia region and Kherson region; - extension of the period of validity of the procedure for payment of insurance premiums established by clause 1.3 of Article 430 of the Tax Code for individual entrepreneurs who do not carry out payments to employees operating in the territories of the Donetsk People's Republic, Luhansk People's Republic, Zaporizhia region and Kherson region in a fixed amount of 25,200 rubles for the period 2025-2026, 36,000 rubles for the period 2027, in general – from the beginning of the period 2028.;

- establishment for taxpayers applying the simplified taxation system and operating in the territories of the Donetsk People's Republic, Luhansk People's Republic, Zaporizhia region and Kherson region, a reduced insurance premium rate of 0.0% above the single limit value of the base for calculating insurance premiums and a single reduced insurance premium rate of 7.6% within the established single limit the size of the base for calculating insurance premiums;

- extension of the procedure for calculating penalties for late performance of duties to pay taxes, provided for in paragraph 1, paragraph 4, Article 75 of the Tax Code, to organizations operating in the territories of the Donetsk People's Republic, Luhansk People's Republic, Zaporizhia region and Kherson region;

- extension of the period of exemption from liability established by paragraph 5 of the Decree of the Government of the Russian Federation ^[18] No. 2529 dated 12/30/2022 for taxpayers operating in the territories of the Donetsk People's Republic, Luhansk People's Republic, Zaporizhia region and Kherson region.

^[1] The new Russian regions turned out to be subsidized by almost 90%. Forbes. Access mode: (https://www.forbes.ru/finansy/490324-novye-rossijskie-regiony-okazalis-dotacionnymi-pocti-na-90 - (date of application: 07/12/2024)

^[2] Distribution of subsidies to equalize the budgetary provision of the subjects of the Russian Federation. The Ministry of Finance of Russia. Access mode: https://minfin.gov.ru/common/upload/library/2023/12/main/FFPR_na_2024_-_2026_gody.pdf?ysclid=ly2rjc6ffb727549495 (date of application: 07/12/2024)

^[3] The concept of the foreign policy of the Russian Federation (approved by Decree of the President of the Russian Federation No. 229 dated March 31, 2023)// Consultant Plus. URL: https://online.consultant.ru/riv/cgi/online.cgi?req=doc&base=LAW&n=443540&cacheid=4637ADC6610A1417305330D89E789696&mode=splus&rnd=PuJaWA#jr0TfIUM3z53FbKp (date of application: 08/12/2024)

^[4] Federal Law No. 377-FZ dated November 29, 2014 "On the Development of the Crimean Federal District and the Free Economic Zone in the Territories of the Republic of Crimea and the Federal City of Sevastopol"

^[5] According to the statistical tax reporting of the Federal Tax Service of Russia on form No. 1-NM

^[6] Unified Register of small and medium-sized businesses. Access mode: https://rmsp.nalog.ru

(accessed 08/18/2024)

^[7] Information from the Federal Tax Service of Russia "The Federal Tax Service of Russia compared the tax burden of a typical enterprise for different tax regimes"// Consultant Plus. URL: https://www.nalog.gov.ru/rn77/news/activities_fts/9033077 / (date of access: 08/20/2024)

^[8] Federal Constitutional Law No. 5-FZ dated 04.10.2022 "On the Admission of the Donetsk People's Republic to the Russian Federation and the formation of a new Subject within the Russian Federation - the Donetsk People's Republic"//Consultant Plus. URL: https://online.consultant.ru/riv/cgi/online.cgi?req=doc&base=LAW&n=465560&dst=0&edition=etD&rnd=i5fz4A#qkwsEOUMborar48b1 (date of application: 08/26/2024)

^[9] Federal Constitutional Law No. 6-FKZ dated 04.10.2022 "On the admission of the Luhansk People's Republic to the Russian Federation and the formation of a new subject within the Russian Federation - the Luhansk People's Republic"// Consultant Plus. URL: https://online.consultant.ru/riv/cgi/online.cgi?req=doc&base=LAW&n=465556&dst=1000000001&cacheid=96CB156DD23DAAF2263B4F81FFA983B3&mode=splus&rnd=i5fz4A#Or5uEOU0WiYBsF5v (date of application: 08/26/2024)

^[10] Federal Constitutional Law No. 7-FKZ dated 04.10.2022 "On the admission of the Zaporozhye region to the Russian Federation and the formation of a new subject within the Russian Federation - the Zaporozhye region"// Consultant Plus. URL: https://online.consultant.ru/riv/cgi/online.cgi?req=doc&base=LAW&n=465558&dst=1000000001&cacheid=820F0DFE6113B2A2F2201B66AD0C3D81&mode=splus&rnd=i5fz4A#6ZvuEOUxUsAtkP23 (date of application: 08/26/2024)

^[11] Federal Constitutional Law No. 8-FKZ dated 04.10.2022 (as amended on 12/25/2023) "On the admission of the Kherson Region to the Russian Federation and the formation of a new subject within the Russian Federation - the Kherson region"// Consultant Plus. URL: https://online.consultant.ru/riv/cgi/online.cgi?req=doc&base=LAW&n=465559&dst=1000000001&cacheid=DD00AB7DCE1EDA3D6354A6132F1876EE&mode=splus&rnd=i5fz4A#QsBwEOUN47v8sEmB (date of application: 08/26/2024)

^[13] Decree of the Government of the Russian Federation dated 04.04.2016 No. 265 "On the maximum values of income received from entrepreneurial activity for each category of small and medium-sized businesses"// Consultant Plus. URL: https://online.consultant.ru/riv/cgi/online.cgi?req=doc&rnd=2F35Sw&base=LAW&n=196415&dst=100005&field=134#EdXqtLU1jFneiqPA (accessed 08/18/2024)

^[14] Federal Law No. 176-FZ dated 07/12/2024 "On Amendments to Parts One and Two of the Tax Code of the Russian Federation, Certain Legislative Acts of the Russian Federation and the Invalidation of Certain Provisions of Legislative Acts of the Russian Federation"// Consultant Plus. URL: https://www.consultant.ru/document/cons_doc_LAW_480697 / (date of application: 08/02/2024) ^[15] Parameters of the tax package of the Ministry of Finance. Generalization// Interfax Information Group. Access mode: https://www.interfax.ru/business/962786 (date of application: 08/20/2024)

^[16] Statistics on the state registration of the Federal Tax Service of Russia. Access mode: https://www.nalog.gov.ru/rn77/related_activities/statistics_and_analytics/regstats / (date of request: 08/20/2024)

^[17] Decree of the Government of the Russian Federation dated 02.12.2022 N 2216 "On the specifics of providing state services for vehicle registration and issuing driver's licenses, as well as on amending paragraph 14 of the Rules for State Registration of Vehicles in the registration units of the State Road Safety Inspectorate of the Ministry of Internal Affairs of the Russian Federation"// Consultant Plus. Access mode: https://online.consultant.ru/riv/cgi/online.cgi?req=doc&base=LAW&n=433513&cacheid=D0CB35C947E19C00C696E840320E3C9C&mode=splus&rnd=rLAGXw#IqPC6MUIWWB7i1Z01 (date of application: 08/20/2024)

^[18] Decree of the Government of the Russian Federation dated 12/30/2022 No. 2529 "On approval of the specifics of the application of legislation on taxes and fees in the territories of the Donetsk People's Republic, Luhansk People's Republic, Zaporizhia region, Kherson region in 2023"// Consultant Plus. Access mode: https://online.consultant.ru/riv/cgi/online.cgi?req=doc&rnd=rLAGXw&base=LAW&n=436533&dst=100028&field=134#Syw56MUXcrCvEUc9 (date of application: 08/20/2024)