On May 23, Danil Getmantsev, chair of the Parliamentary Committee on Finance, Taxation and Customs Policy, confirmed the government's intention to increase taxes to expand budget revenues in 2024.

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Prior to that, Ukrainian Forbes, citing sources, published approximate parameters of such an increase, albeit with a significant leeway in the figures. The bill is allegedly being prepared by the Ministry of Finance. At LIGA.net's request, the Ministry refused to comment publicly on this topic.

It is assumed that the value added tax (VAT) will be increased by 2-3%, which is currently 20%. An increase in the military tax from the current 1.5% to 5% and its application to sole proprietors on the single tax is also being discussed.

The reasons for this step are cited by the Ministry of Finance as the need to finance the Defense Forces. According to Finance Minister Sergiy Marchenko, the budget needs an additional UAH 400 billion ($9.87 billion) to finance the army's expenses and another UAH 300 billion ($7.41 billion) to ensure mobilization.

In addition, on May 13, the Ukrainian parliament registered bill No. 11256, which provides for an increase in fuel excise taxes – by 13% on gasoline and diesel fuel and three times on autogas starting July 1. Further, excise taxes will be increased on January 1 each year until they reach the European average in 2027. In total, in 2027, excise taxes on gasoline will increase by 68%, on diesel fuel by 54%, and on autogas by five times.

Most of the additional taxes will be borne by end consumers. The only exception is the unified social tax, which businesses will pay for their employees to avoid reducing wages.

LIGA.net asked business representatives about their attitude to the government's initiative.

Oleksandr Sokolovskyi, chairman of the Ukrainian Association of Light Industry Enterprises and founder of Textile-Contact, agrees with the need to increase the revenues, but warns against inefficient spending.

"On the one hand, I'm against raising taxes, but if it goes to defense, then what's the point of arguing with the state? I am not ready to answer yet. Besides, I am not an expert in macroeconomics and do not work with objective figures. But it would be very interesting to see how the budget is implemented in terms of revenues in 2024, what percentage of expenditures is covered by Western aid, and what is the distribution of expenditures. If the growth is used to increase funding for numerous non-combatant security agencies, such as the Prosecutor General’s Office and others, then this is one thing, and if it is used for the Ukrainian Armed Forces, then this is another. But I do not have such figures. Therefore, it is difficult to comment objectively on anything," Sokolovskyi says.

The Retail Association of Ukraine, whose members will be most affected by the increase in VAT and fuel prices, believes that what is needed is not a mathematical increase in taxes, but a systemic tax reform.

"We should focus on serious and systemic economic reforms, which should include tax reform. The problems of Ukrainian tax and budget policy and their negative impact on economic development were obvious before the aggression against Ukraine. It is also obvious that it will be very, very difficult to repel the aggression and develop the Ukrainian economy from the rear with such tax and budgetary policies."

Ukraine needs to become competitive in the global market to retain entrepreneurs and attract investment. Military risks need to be compensated by something, such as reducing the tax burden. If this is not done, we will continue to read news about millions of Ukrainians moving into the shadow economy or setting up businesses in EU countries and investing in the economies there.

There are also budgetary reserves: out of about UAH 3.3 trillion ($81.5 billion) of the consolidated budget, it is planned to spend about UAH 1.1 trillion ($27.2 billion) on defense and security, which is not even half. As a result, some experts and politicians are raising the question of whether ostentatious landscaping and various schemes for "cutting" budget funds during the war could be reduced instead of increasing the tax burden on businesses. However, there is also a positive trend: according to the Ministry of Finance, in January-March 2024, the general fund of the state budget expenditures on the security and defense sector amounted to UAH 408.2 billion ($10.1 billion), or 58.9% of the total amount of general fund expenditures.

As for the tax increase, it will gradually lead to an increase in expenditures and, accordingly, the cost of goods and services. Consequently, prices will rise, and consumption will decrease. If these additional costs are compensated to consumers by some other additional sources of income, neither businesses nor consumers will feel a sharp negative impact: the price increase will be offset by additional income. Although it is possible that some citizens will reduce consumption – those who receive various social benefits that cannot be increased for the time being, while others will benefit from additional financial incentives.

It is not yet possible to conduct a full mathematical modeling of the consequences: it is not known when additional taxes will affect the price of fuel, or how much additional VAT will affect prices, but it is possible that in this case, the retail industry will once again have to reduce its profitability for some time after the start of the full-scale invasion to prevent price increases and maintain food security. Fuel today is not only about meeting logistical needs, but also about the stable operation of retail chains, which, due to power outages, must use alternative power sources (such as generators) and open their doors to Ukrainians as points of invincibility. Accordingly, if fuel prices rise, this will cause an additional blow to the profitability of the retail industry, because it is already clear that power outages will be constant for an indefinite period of time," the association believes.

The medical industry has its own opinion on the tax increase. The owner of Medtekhnika, Oleksiy Davydenko, has the most questions about the rationality of the increase in military duty.

"Such steps of the authorities should be treated as a situation in which one could find oneself. That is, expenditures are outstripping revenues, but not financing expenditures threatens existence.

If you don't analyze the whole figure, the excise tax increase is good. As for the VAT, there are more disadvantages than advantages. As for the military duty, it is good, but I agree with those who question the rationality of this figure of 5%.

If we look at medicine, it is all on the preferential VAT rate of 7%. If the situation is so stalemate, maybe it's time to raise/level this figure?" says Davydenko.

Restaurateur Yevhen Klopotenko sees the problem in the fact that a tax increase will reduce the income of citizens, who will support the army less.

"I personally believe that this should be done if we want to win thanks to us, not our foreign partners."

It will be a challenge for businesses and will definitely not bring them out of the shadows, but I believe that businesses need to grow up. On the other hand, it may lead to a decrease in donations.

I would not look for an alternative, but would change the state's communication policy on the state of financial affairs in the country," says Klopotenko.

Agrarians see the biggest problem in tax increases being made without advance warning, which prevents businesses from predicting their costs. Mykola Babenko, director of the Meat Industry Association, sees an alternative to raising taxes in stimulating domestic processing of raw materials, which will increase the tax base and, accordingly, the amount of taxes.

"Increasing the tax burden is a negative for any business. Especially if it is urgent (i.e. without warning), and in times of war, when problems are accumulating. Not to mention the possibility of a ‘black swan’ arriving, after which nothing remains of production.

Tax changes should be predictable. Businesses should be aware of such changes at least six months in advance to cut costs, consult with creditors, adjust investment programs (deferred payments), and make personnel decisions.

Given the shortage of personnel, an increase in the military duty is a tax on business, not on employees, no matter what they say. As for the VAT increase, it is also an increase in costs for business when it is the end consumer. In our industry, this applies to the purchase of feed and medicines. The military duty is +3.5%, VAT is +3%, and fuel excise taxes are going up when we have to buy fuel for generators. We need to do the math, but all in all, this is a significant increase in tax costs.

There is an alternative to increasing the tax burden – the development of pig farming. Government policy can provide an incentive for the accelerated development of pig farming. Namely stimulating investment, making loans available, and simplifying export opportunities. If pig farming starts consuming just half of the corn exported from Ukraine, it will bring $6 billion in added value annually. If the production of bioethanol from corn is also stimulated, then we can talk about $10-12 billion in added value. The synergy here is that bioethanol production waste – vinasse – is feed for pigs. Even with the existing tax base, this will bring more to the state budget than the tax initiatives of the Ministry of Finance," says Babenko.

Banks will also feel the consequences of the military duty increase. After all, the tax base for the military tax is, among other things, income from savings. The increase in the military duty will make savings less appealing as an investment instrument compared to others. Dmytro Zamotayev, Director of Retail Banking at GLOBUS Bank, believes that this will lead to increased competition between banks for depositors.

"First of all, it is worth saying that the attractiveness of hryvnia deposits will remain quite high even if the income tax and military duty are increased. There are several reasons for this.

Hryvnia deposits are in fact a non-alternative mechanism for passive income. Very often, experts talk about government bonds (because profits and investment income are not taxed) and the potential for securities to bring more income. However, for most people, the ‘game’ in the securities market is inaccessible: it requires hundreds of thousands of hryvnias and certain knowledge, understanding of the market, etc.

Foreign currency deposits are now most often used as a ‘safety deposit box’: the annual return on dollar deposits is on average 1.8%, and on euro deposits – 1.4-1.6%.

Banks have become more active in developing longer-term deposits, which range from 1 to 2.5 years. It is for such savings products that the highest interest rates are fixed, in particular, up to 15.5% per annum. That is, taking into account possible ‘new’ taxes, inflation (let me remind you that the projected inflation rate may be 8.6%), the net profit on hryvnia deposits, although somewhat reduced (especially for short-term deposits), will remain at a decent level – which is 5-6%.

Of course, a decline in net profit is unlikely to make people happy. But if we look a little wider, it becomes clear that the state simply has no actual alternative: although no one says it out loud, it can be read between the lines. The new law on mobilization will require enormous financial resources that the state does not have. The adopted budget for 2024 does not provide for additional spending on strengthening mobilization measures, as the law did not exist at that time. In other words, the alternative is to print money, which is extremely undesirable and will undermine all economic progress in the country.

Of course, competition for depositors may intensify between banks, as citizens will choose deposit programs that are more flexible in terms of early termination of agreements or the amount of ‘sanctions’ for deposit termination. In addition, the interest rate, as always, will play a leading role. We do not rule out that the market may periodically see temporary promotional programs promising deposit yields 0.5-1% higher than those of competitors. In other words, banks will not wait for the dynamics of new depositors to ‘sag’, but will take incentive measures during the ontroduction of new possible taxes," says Zamotayev.

The opinion of Volodymyr Popereshnyuk, co-founder of Nova Poshta delivery service and a systemic opponent of tax increases and excessive regulation, posted on his Facebook page is interesting. In his opinion, it is impossible to increase budget revenues by raising taxes alone. They increase with economic growth.

"Getmantsev claims that there are only two sources of funding for the army – taxes and borrowing. But this is seeing the trees and not seeing the forest.

The real source of funding for the army is the economy! Taxes, donations, direct assistance to the military, logistics and production of weapons, materials, vehicles, drones, tablets are the products of economic activity, its consequences. These are all ways to provide for the army, but not the source.

If we raise taxes, which, by the way, is one of the most inefficient ways of financing, then donations, direct assistance to the military, food production, etc. automatically decrease. So with the increase in taxes by one hryvnia, the real aid to the army will also decrease by one hryvnia.

Overall, raising state budget revenues only by raising taxes in the short term is impossible. This is hampered by the economy's overall size and the population's and businesses' ability to resist forced tax collection.

Every state seeks to constantly increase the tax burden on people and businesses, thereby achieving the maximum possible revenue from the national economy.

Further increases cause people to resist, people begin to move more actively into the shadows, corruption grows even more, investments decrease, the number of employees of companies and entrepreneurs decreases, and the economy slows down. And overall tax payments may even collapse. The Laffer curve to the rescue.

Therefore, tax revenue growth is possible only along with the growth of the entire economy. And for this to happen, deregulation and tax cuts are needed.

Getmantsev argues that there is no alternative to increasing funding for the army, but there is one that is more effective. It is a reduction in public spending, deregulation, privatization, tax cuts, and encouragement of direct assistance to the army," writes Popereshnyuk.

It is worth noting that the European Business Association (EBA) refused to comment on the tax increase at the request of LIGA.net until the bill with specific parameters is registered in the legislature. The Federation of Employers of Ukraine ignored our request.