Support measures for IT industry may bring software prices hike

The Russian government may increase VAT on software and online services in order to compensate for special tax privileges it introduced to support the country’s struggling IT industry and prevent a brain drain.

Tax privileges granted to the Russian IT sector by the government are likely to result in higher software prices, as authorities intend to pass their costs on to IT product customers, considers bne IntelliNews. At the beginning of June, Russia’s major IT associations sent a letter to Prime Minister Mikhail Mishustin warning that the country’s tech industry could experience a severe brain drain due to the coronavirus pandemic and subsequent economic crisis if the government doesn’t support the sector. According to the letter, 10,000-15,000 IT professionals could leave Russia by the end of 2021.

As a result, the IT industry got special support from the Kremlin in the framework of the national plan for economic recovery. In his address to the nation on 23 June, President Putin announced a set of measures aimed at boosting the local IT sector, including a cut from 14% to 7,6% in the social security mandatory payment rate for IT companies and a decrease from 20% to 3% in the profit tax rate. According to Putin, the sector would enjoy one of the lowest profit tax rates in the world. Besides, the government promised 11,4 billion rubles ($159 million) of subsidies to companies put on the registry of domestic software manufacturers.

First Deputy Prime Minister Andrey Belousov proposed to reinstate value-added tax (VAT) on software products as of January 2021. Photo: kremlin.ru

These steps are likely to put a serious burden on the national budget, so the government is trying to offset losses. First Deputy Prime Minister Andrey Belousov proposed to reinstate value-added tax (VAT) on software products as of January 2021. The reinstatement can bring extra 42,5 billion ($593 million) to the country’s budget, but software prices are expected to increase by 16% (the size of VAT).

In 2017, the Russian government introduced the so-called Google tax, which was basically reinstated VAT applicable only to foreign companies that sell their digital products and services in Russia. The new taxation primarily hit Google and other global tech giants but not Russian companies, which were exempt from it.

Now local IT companies are afraid that the reinstatement will affect their sales negatively, as their product and services will become more expensive. According to Renat Lashin, executive director of Local Software association, signing new contracts is now taking more time because customers are less enthusiastic. An increase in software prices due to the tax hike would have a negative impact on IT companies’ competitiveness, said Olga Minayeva, director for interaction with government institutions at ABBYY Russia. She added that new privileges for the tech sector should not be accompanied by the removal of existing ones.

On the other hand, the move can push major Russian IT companies to seek foreign customers more actively, as software exports are not subject to VAT, considers bne IntelliNews.

By Anna Litvina