It will force businesses to go into the shadows. Why the government's tax increase initiative is dangerous

The authorities are planning a significant tax increase this year. According to the government, the budget lacks UAH 500 billion to finance the defense sector. In this regard, a draft law was submitted to the Verkhovna Rada that would increase the military tax. It provides, among other things, for an increase in the military tax rate to 5%, and for some transactions to 30%. The document is harshly criticized by representatives of the expert community, business representatives, and MPs themselves, UNN writes.

What the Rada says

Danylo Hetmantsev, chairman of the Verkhovna Rada Committee on Finance, Taxation and Customs Policy, who has repeatedly lobbied for tax increases and belt-tightening for businesses and Ukrainians, supported the government's initiative, noting that he sees no other options than to agree to the Cabinet's proposal to raise certain taxes (military duty, excise taxes, in particular on fuel and tobacco), increase the relevant tax base, and place more domestic government bonds, which may also include NBU issuance.

"Yes, this is a bad decision that will hinder economic recovery, the growth of citizens' incomes and potentially pose risks to macro-financial stability. However, there is no other way than to close the gap in the military now, because in a few months we will face a significant shortage of funds for the current maintenance of the army, which will begin to deepen sharply by the end of the year," Hetmantsev wrote .

However, Hetmantsev's colleagues in the Tax Committee do not share his views. In particular, the First Deputy Chairman of the Committee on Finance, Taxation and Customs Policy Yaroslav Zheleznyak criticized the initiative to raise taxes, noting that he did not understand why such tax changes were proposed and what calculations they were based on.

"Okay, my position is on the government's initiative to raise taxes. It's just a shame. It's not just that some points are unclear where they came from, some random ideas that are not connected by logic or necessity. Then, for PR purposes, they called this whole mix of fantasy and borscht in one word "military tax" and introduced it to the Rada without any explanation, shouting "we urgently need money," Zheleznyak emphasized.

Zheleznyak's colleague, Nina Yuzhanina, a member of the Rada's tax committee, emphasized that the effect of the tax increase would be temporary and could lead to even greater relocation of businesses abroad.

"Of course, we are just starting to discuss... but there will be a tough dialogue ahead, and it is precisely because this draft law was rolled out without even discussing it with the members of the (tax - ed.) committee, without hearing the proposals, that such a crude draft law was issued, which will simply shake the whole country so that entrepreneurs will now make decisions and continue to move not to the West but to Eastern Europe, I'm sorry, this is an ill-considered act and ill-considered policy. I think there will be more negatives than positives. Perhaps in the short term, there will be some additional revenues, but they will be absorbed in the shadow economy, in the fact that business will be reduced," Yuzhanina said.

The harsh criticism of the document even provoked a reaction from Parliament Speaker Ruslan Stefanchuk, who in an interview  hinted that the government's proposals to raise taxes and the philosophy of "taking a little bit in many places" could be replaced by a VAT increase. At the same time, the VRU Speaker noted that everything would depend on the discussion in the relevant committee headed by Hetmantsev.

What economic experts think about the tax increase

Experts point out that a significant tax increase will have a short-term effect, and ultimately have a negative impact on Ukraine's defense capability.

"These figures are not officially discussed, because no one counts these figures, we have only done a modeling. So, medium, large, and small businesses donate about UAH 200 billion a year. If this money is taken away from business by increasing taxes, the efficiency of using this money will decrease significantly, because now UAH 200 billion goes directly to the army in the form of purchased ammunition or weapons. And how will it get through the state bureaucracy, the efficiency of public procurement, and corruption schemes? How much of this money will eventually reach the army? So is it worth destroying business in this way, destroying our defense capability?" - said Andriy Dligach, Doctor of Economics, CEO of Advanter Group, at a press conference.

Economists emphasize that such a decision, if supported by the parliament, will encourage businesses to go "into the shadows.

The Chamber of Commerce and Industry called on the authorities to focus on attracting international assistance instead of increasing tax pressure on businesses that are already suffering from Russian aggression.

"Ukrainian businesses, especially small and craft businesses, are crucially important right now for jobs and self-employment, which guarantee social stability. It is SMEs that are at risk of being absorbed by the gray economy in the face of rising taxes. Additional fiscal pressure will not allow those who want to develop in Ukraine to come out of the shadows. A more rational solution would be to look for reserves by improving the efficiency of regulatory authorities (performance indicators), dismantling existing tax evasion schemes (smuggling, counterfeiting, illegal trade, unofficial wages, etc.), automating business processes and temporarily raising the rates of existing taxes," the CCI said in a statement  .

The organization emphasized that the government should work to reduce secondary expenditures and implement institutional reforms. In particular, to reboot the customs and tax services, establish effective KPIs for the BES, State Tax Service, and State Migration Service, and ensure annual assessment of losses from various taxes using the tax gap methodology.

According to the CCI, it is also necessary to improve the administration of the real estate tax and utilize its full potential and automate tax administration processes as much as possible.

In an exclusive commentary to UNN, Serhiy Dorotych, head of the #SaveFOP movement, noted that when there is a crisis at an enterprise or anywhere else, the first thing that is considered is the possibility of saving money. "And when we hear that there is not enough money for the army and taxes need to be raised, but we look at the budget for this year and there are increased expenditures for all ministries and government programs, when we hear that despite the fact that taxpayers' salaries are growing against the background of a burden not on business, the burden is on the average Ukrainian, because the end consumer pays for any burden in terms of higher prices for goods and services, it does not fit into sound logic," Dorotych said.

In his opinion, the government should first of all save money on the state apparatus, which should be reduced by at least a third, or even two or three times.

"Therefore, it is definitely inappropriate to raise taxes, there should be budget savings. And if we clearly review the expenditures on the state apparatus and reduce them, we will not have to raise taxes," Dorotych is convinced.

Business against tax hikes

The government's initiative was also criticized by representatives of business in Ukraine, both large and medium-sized. In particular, Volodymyr Popereshnyuk, co-owner of Nova Poshta, noted that poor countries have never had economic freedom, only high taxes, strict regulations, and a large state apparatus. According to him, such an approach deprives entrepreneurs of the chance to create wealth, accumulate capital, develop technology, and increase labor productivity.

"And when officials raise taxes once again in a poor country, they perpetuate poverty and hinder economic growth and welfare. This is the root problem, because the economy, not taxes, is the source of defense funding. No matter how much you kick a tortured cow or pluck a weak goose, you won't get more milk and feathers. Raising taxes can only finally send the cow and the goose to the next world, that is, push the economy to collapse," Popereshniuk wrote on his Facebook page, recalling the famous statement by the head of the Rada's tax committee, Danylo Hetmantsev, that "taxation is the art of plucking a goose so that it does not scream.

In the context of tax increases, monobank co-founder Oleg Gorokhovsky recalled a phrase from The Godfather:

"Now listen... Whoever comes to you to arrange a meeting with Barzini is a traitor.

The Godfather, 1969

____

"Now listen... Anyone who comes to you with a proposal to raise taxes in a country at war is a traitor."

Me, 2024," wrote Gorokhovsky on his Facebook page.

Oleksandr Konotopskyi, a member of the Presidential Council for Support of Entrepreneurship under Martial Law and founder of Ajax Systems, believes that taxes in Ukraine should not be raised at this time. "Taxes cannot be raised. This is an architectural thing. Neither citizens nor businesses are ready for it. Taking into account the widespread culture of tax evasion in the country, raising taxes will only lead to the shadowing of the economy. Taxes in Ukraine need to be reduced. And everyone should be taught to pay them," he wrote  .

Konotopsky emphasized that an increase in the tax burden would lead to an increase in the shadow economy. In addition, he believes that some provisions of the government's draft law contradict the Constitution. "I'm not saying that Diia City's taxes have been enshrined in the Constitution for 25 years. And in fact, the proposed law violates it, and Ukraine will have two conflicting laws on taxes," he said.

The Union of Ukrainian Entrepreneurs (SUP) also believes that increasing the tax burden will not help bring Ukraine's victory in the war against Russia closer.

"The war did not stop business. Business has been stopped by higher taxes... coming soon! Historically, countries that have been involved in war have done the same thing - raised taxes. Will raising taxes lead to victory? Definitely not!!! Ask Italy, Japan, and Germany, which lost World War II, about this. We now have enormous support from countries that expect us to fight corruption, not raise taxes, that expect us to be democratic and sustainable," said Serhiy Grach, Deputy Chairman of the Committee on Information and Communication Technologies of the SUP.

Representatives of small businesses are already starting to talk about the fact that they will be forced to stop their activities. First of all, it is a small jewelry business that is going to be forced to pay the highest military tax - 30%. For example, Dari Chernikova, the owner of the DARI jewelry brand, said in an exclusive commentary to UNN that the government's initiative would kill small jewelry businesses.

Chernikova noted that in addition to the military fee, jewelers also pay income tax and a single social contribution. That is, after the interest rate on the military tax increases, this business will have to pay more than a third of its working capital. "The jewelry business is broad, in that there are big players... Some argue that this is a luxury tax. Yes, there are earrings that cost USD 150 thousand, and I agree that it is a luxury. But I, for example, have a big price fork, I have silver coffee mugs that cost, for example, UAH 900, and this is not a luxury," Chernikova said.

Ukrainian jeweler Yulia Wall shares a similar opinion.

"The 30% military sales tax will kill small jewelry creators (draft law from the Cabinet of Ministers No. 11416). It will simply kill authentic small jewelers who make their own jewelry as they see it and pay taxes. This means that it will kill the most hardworking, talented, and honest people. I don't think it's a mistake and the government was counting something wrong, like the marginality of brands like Cartier or the overbuying of Chinese. No, this is a targeted action against the jewelry culture, against small creators," she said .

Dmytro Oleksiyenko, vice president of the international business association ICC Ukraine, is convinced that the tax hikes proposed by the Ukrainian government will lead to the failure of entire sectors of the economy and a rapid rise in inflation.

"We need money for the army, but the government, instead of closing the bottomless holes of tax evasion in gray and black businesses, continues to "pinch the geese" in the white business sector, which pays taxes regularly. Unless there is a dialogue between the government and business associations, the proposed solutions will lead to the failure of entire sectors of the economy and a jump in inflation," he said on Espresso TV channel.

Recall

Earlier, the initiative to increase taxes was criticized by mobile operators operating in Ukraine. They warned that the adoption of the proposed amendments to the Tax Code by the parliament would mean a step backward in the availability of mobile communications, which is critically needed in times of war.