VAT increase instead of military duty: what alternative is offered to the Government?

Think tanks have analyzed the government's draft law No. 11416 "On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine on Peculiarities of Taxation during the Period of Martial Law" and note that the draft contains a number of extremely negative provisions that will cause significant damage to the economy.

In particular, these are the norms listed in the table:

	Measure	Assessment by think tanks	Expectations of the Ministry of Finance for 2025 (UAH billion) - the figures are questionable according to experts
1	Increase in the military tax rate from 1.5% to 5%	An extremely negative proposal, which will lead to further shadowing of wages and depression of economic activity. The calculation of the Ministry of Finance is overstated - it is mechanical and does not take into account the effects of shadowing	107, 7
2	Establishing the obligation to pay the military fee:
2.1	- by legal entities in the amount of 1.0% of income from any activity for corporate income tax payers and single tax payers of the third and fourth groups	This is the most negative proposal of the Ministry of Finance. The turnover tax is extremely negative for the economy, distorts competition and discriminates against Ukrainian producers. It is proposed not to introduce new taxes, but to solve the problem by temporarily raising the existing ones for a certain period of time. Instead of the turnover tax, the VAT rate should be raised to the level that will allow to receive the specified revenues	145,7
2.2	- For individual entrepreneurs- single tax payers of the first, second and fourth groups in the amount of 5% based on two minimum wages per month	Doubles the tax burden on payers of the 1 gr. EH - it is advisable to replace it with one minimum wage	7,8
2.3	- Individual entrepreneurs- single tax payers of the third group in the amount of 1.0% of income	It is advisable not to introduce an additional fee and additional administration, but to introduce a temporary surcharge to the existing single tax rate for group 3 up to 6%	5,9
2.4	- by legal entities and individuals that carry out transactions on the purchase of precious metals from banks in the amount of 5% of the value of precious metals		0,06
2.5	- enterprises, institutions and organizations and individual entrepreneurs engaged in retail trade in jewelry made of gold, platinum and precious stones (including those made from tolling raw materials) in the amount of 30% of the value of jewelry sold	The proposed ECT rate will significantly increase the shadowing of the industry, "kill" or push into the shadows small jewelry businesses that currently operate in the legal field	0,43
2.6	- enterprises, institutions and organizations, individuals who acquire ownership of passenger cars subject to the first state registration in Ukraine by the territorial bodies of the Ministry of Internal Affairs of Ukraine, except in cases of providing passenger cars to persons with disabilities in accordance with the law and inheriting passenger cars in accordance with the law, in the amount of 15% of the value of the acquired movable property	It is advisable to tax expensive cars, starting from a certain threshold amount of customs value	24,5
2.7	- Individuals who sold one real estate object during the reporting tax year in the amount of 5% of the income from the sale of real estate	Given the current administration of real estate transactions, the introduction of the tax will increase shadowing and understatement of the tax base, thus the effect on the budget will be lower than expected.	2,9
2.8	- by mobile operators in the amount of 5% of the cost of any mobile services paid by end users of such services		2,7
paras. 2.4-2.8		Small payments that create an additional administrative burden on businesses and fiscal authorities, require additional bylaws and infrastructure for payment (cannot become an urgent source of revenue) the proposed taxation of transactions (with the exception of 2.8), which potential taxpayers can either conceal or postpone until the temporary fees are canceled. Accordingly, the already meager revenues will be many times less.
3	Establishment of the obligation to make monthly advance payments of corporate income tax by taxpayers engaged in fuel retailing in the amount of 0.5 minimum wage established by law as of January 1 of the reporting (tax) year for fuel stations selling fuel per 1 cubic meter of fuel storage tanks		28,2
4	Introduction of the excise tax on products under the code 2202 10 00 00 according to the Ukrainian Classification of Goods for Foreign Economic Activity "water, including mineral and carbonated water, with sugar or other sweetening or flavoring substances" at the rate of EUR 0.1 per 1 liter	According to the excise tax, it should be proportionate to the social harm caused by the consumption of the product. Therefore, if sugar is considered harmful, it is advisable to set the tax with differentiation by sugar content (for example, a lower rate for beverages with sugar content from 5 to 9 grams, and a higher rate for beverages with sugar content over 9 grams per 100 ml of beverage). At the same time, beverages with a sugar content below the threshold that contain "other sweetening and flavoring substances" should not be subject to such a tax.	7,8
5	Abolition of the provisions stipulating that the importation of goods not exceeding the equivalent of EUR 150 is not subject to VAT (except for the importation of goods with a total invoice value not exceeding the equivalent of EUR 45 for one recipient without any payment)		8,0
	TOTAL		341,9

According to experts, the proposal of the Ministry of Finance to seek additional revenues by introducing new taxes that provide for additional reporting forms, introduction of new administration and control procedures (military duty, turnover tax) is extremely burdensome for the state and business. A more rational solution would be to look for reserves by improving the efficiency of regulatory authorities (performance indicators), disrupting existing tax evasion schemes (smuggling, counterfeiting, illegal trade, unofficial wages, etc.), automating business processes and temporarily raising existing tax rates.

Also, along with the search for additional revenues from business, an important solution would be to reduce secondary expenditures of the national budget.

A possible rational solution to finding additional revenues would be to increase the VAT rate by 4-5 percentage points.

Advantages:

- The VAT is much less harmful to the economy than most of the taxes proposed above. The negative effect will be an increase in prices for all goods and services, but within the range of less than 5%;

- it does not require any additional administrative actions, and an increase in revenues should be expected as early as next month;

- under current conditions, according to the assessment of the tax gap, VAT is paid at 93% of the theoretically calculated rate and has a very low elasticity, so we can count on the corresponding revenues (unlike the fees proposed by the CMU).

At the same time, simultaneously with the implementation of temporary measures, it is necessary to immediately implement systemic changes that will bring additional revenues to the state budget next year, namely

to minimize "shadow schemes" and fill the budget, it is necessary to ensure the speedy implementation of institutional reforms - rebooting the Customs and Tax Services by commissions with a predominantly international voice (ROMs No. 6490d and No. 9243), establishing effective KPIs for the BES, the State Tax Service, the State Migration Service, and ensuring annual assessment of losses from various taxes using the tax gap methodology;
improve the administration of the real estate tax and utilize the full potential of this tax;
automate tax administration processes as much as possible.

The think tanks call on MPs and the Ministry of Finance to hold a professional discussion of all alternatives and identify the least harmful for the economy norms for further implementation.

Economic expert platform

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