Business and government in Ukraine are publicly slamming one another over a proposed tax hike Kyiv says is necessary to fund its fight against Russia.
Earlier on July 18, the Finance Ministry announced that the government had approved draft changes to the 2024 budget law that included an increase in defense spending by Hr 500 billion ($12 billion).
The government wants to partly fund its plans with an increase in taxes and other duties, including war taxes on individuals and businesses as well as additional levies on imports and higher excise duties. The plan is to raise around $3.3 billion from the increased taxes by the end of the year.
The ministry said it will ask parliament to approve an increase of a war tax for individuals to 5% from the current 1% and impose a 1% military tax on corporate revenues.
The tax hike — which would be the first since the start of the full-scale invasion — also envisions broadening the group of residents eligible for the military tax, including small business owners and individual entrepreneurs.
The government also said it's planning to raise the funds by saving on its foreign debt servicing, made possible by a recent debt restructuring deal with bondholders, and domestic government bonds.
While the government has said it has chosen the “softest” option for financing its military needs, major business associations and businesspeople have publicly opposed the proposed changes.
Businesses say that any additional taxes will only put more pressure on already struggling tax-paying businesses and will push more business activity into the shadow economy. They have called on the government to crack down on illicit business before going after honest taxpayers.
The American Chamber of Commerce (AmCham) in Ukraine said in a statement that the proposed tax hike discriminates against “bonafide transparent taxpayers” and encourages tax evasion, calling on the government to avoid implementing the change.
"A sharp one-time increase in the military tax to 5% is likely to result in a decrease in real wages while increasing the attractiveness of informal employment," AmCham wrote in a statement, adding that “losses from the illicit markets of excisable goods over the last year alone exceed $1 billion.”
“All efforts must be made to ensure that individuals and legal entities operating in Ukraine pay their fair share of taxes in effect today,” the chamber said.
Oleh Horokhovsky, CEO of the popular Ukrainian bank Monobank, wrote on his Facebook page that “anyone who comes to you with a proposal to raise taxes in a warring country is a traitor.”
When asked how funds have been raised during previous wars, Horokhovsky wrote that "those who steal and loot during the war were shot."
Tech business association Diia.City United also released a statement on raising taxes on the turnover of companies and personal incomes, calling on the government to work out other sources of revenue for the budget.
Outgoing U.S. Trade Representative to Ukraine Penny Pritzker weighed in, telling reporters on July 29 that while it is up to the Ukrainian government to decide how it generates revenue, she suggests focusing on customs reforms through digitalization and the fight against shadow markets.
“There is a huge source of profit in the gray markets of cigarettes, alcohol, or electronics that can be sold on a large market. That's why we encouraged the Ukrainian government to focus on this in the first place," she said.
Losses to the state budget from illicit tobacco, alcohol, and fuel sales amount to around Hr 45 billion already this year, according to Ukrainian lawmaker Yaroslav Zhelezniak.
A group of Ukrainian think tanks also came out against the proposed changes in an open letter, saying that increasing the value-added-tax rate by 4-5 percentage points would be a better way of raising money for the state.
Among the proposed changes is an additional 15% levy on new car sales on top of the current 5% tax. Finance Minister Marchenko defended the plans from opponents in an interview with RBC Ukraine published on July 30.
"We have a security problem, the house is on fire, and you say that it is not necessary to buy fire extinguishers, but it is better to buy a car. No problem, buy a new car, but you will also support the Armed Forces," he told RBC Ukraine.
Marchenko added that cars brought into the country for the security and defense sector will be imported duty-free.
On whether the tax increase will push the car sales industry further into the shadows, Marchenko said it’s up to law enforcement to fight against the illegal economy.
Chairman of the Committee on Financial, Tax and Customs Policy of the Verkhovna Rada, Danylo Hetmantsev said that while the government’s proposal isn’t ideal, it’s necessary to cover the deficit.
"(The proposed law) needs significant revision. However, the raising of individual taxes to cover the deficit in financing military expenditures, unfortunately, cannot be avoided," he said in a post on Telegram.
According to the committee’s estimates, the government’s ability to financially support the military could worsen by the end of September.
As the government-proposed changes are amendments to the 2024 budget, they will have to pass Ukraine’s parliament and be signed into law by the president.
Lawmaker Zhelezniak wrote that the law in its current form does not have enough support to pass and that members of parliament will have the opportunity to submit alternative proposals in the coming days.
Dominic Culverwell
