The end of the fiscal pause: the state is not just returning taxes to pre-war levels, but increasing them

The government is preparing a decision to increase taxes. There is no draft law yet - the Cabinet of Ministers is working on it. After approval by the government, the document will go to the Verkhovna Rada and its fate will be decided by people's deputies.

The details of what the authorities intend to propose are known in general terms. But one thing is clear from the incoming information: a significant increase in the fiscal burden is expected. This is all the more noticeable against the backdrop of the tax cuts that took place at the beginning of the full-scale invasion. So what is this – “zrada” or a strict necessity? We'll figure it out further together.

Adventures in taxes: reduced in 2022, returned in 2023...

On March 15, 2022, President of Ukraine Vladimir Zelensky announced that he was giving the go-ahead for the implementation of a package of solutions to support the Ukrainian economy. What was in this package? Let's quote the president from his official website:

"First. We are starting tax reform. Instead of VAT and income tax, we give a rate of 2% of turnover and simplified accounting. For small businesses - and these are the first and second groups of individual entrepreneurs - we set the voluntary payment of a single tax. That is, if you can, pay. If you can’t, there are no questions,” said Vladimir Zelensky.

The second step, as the head of state said, will be maximum deregulation of business.

“We are canceling all inspections for all businesses. So that everything works fine. To make cities come alive. So that wherever there is no fighting, life continues. There is only one condition: you ensure the normal operation of your business within the framework of Ukrainian law,” he noted.

But there is no point in dwelling too long on something that was adopted more than two years ago. Moreover, already in May 2022, the first attempts to play this story back began. Then, however, the benefits were defended. The preferential regime was canceled in the summer of 2023 - then it was decided to abandon the simplified taxation system with a rate of 2%.

Now we are talking about further tax increases. In principle, this is expected. Moreover, the IMF expects Ukraine to ensure the stability of the budget and financial system - even in war conditions. How to achieve this? The Fund requires Ukraine to mobilize internal resources as much as possible, including taxes. And the Cabinet of Ministers, apparently, is meeting its partners.

What are we actually paying for?

But before moving on to the government's proposals, we offer a brief excursion into taxes.

So, as of today, we pay personal income tax in the amount of 18% of wages, a single contribution to compulsory state social insurance in the amount of 22%, military duty in the amount of 1.5%.

Ukrainians pay a lot of taxes. And some countries at this time are experimenting with the abolition of VAT

But that's not all. We pay 20% VAT on every purchase, and on excisable goods we also pay excise duty. Individual entrepreneurs pay their own taxes, depending on the category.

We also pay a land tax, the amount of which is set by local authorities; we pay the so-called “luxury” tax - for every 61st “square” of an apartment or 121st “square” of a private house.

At the same time, in the countries of the European Union the VAT rate on vital items (food and medicine) is less than the Ukrainian one. For example, in Germany the VAT rate for medicines and food products is 7%, for all other groups of goods – 19%. In France the general rate is 20%, but health and food products are taxed at just 5.5%.

In general, Poland embarked on an interesting experiment and became the first state in the EU to introduce a 0% VAT rate in 2022. The country has adopted a law that has been dubbed “Anti-inflation shield 2.0.” They reduce the VAT rate on food from 5% to 0%. Also, the tax on fuel is reduced from 23% to 8%, and on mineral fertilizers - from 8% to zero. True, from the very beginning it was envisaged that such norms would be in force temporarily, and on April 1, 2024 they were canceled.

But let's return to Ukraine.

5 percent innovation

The Cabinet of Ministers intends to increase the military tax from 1.5 to 5%. In addition to the military tax, the government is also seeking to increase the value added tax. From the current 20%, the rate may increase to 22-23%. In addition, it will need to be paid when selling real estate or purchasing luxury goods. But the main thing remains the military training. Officials estimate the funds received thanks to the increase in the collection rate to be almost UAH 100 billion. All of them will go to the defense of the country.

Let us recall that the military tax was introduced into Ukraine after the start of Russian aggression in 2014 and since then its rate has not changed, although there were proposals in parliament to double it. Meanwhile, there are countries where the equivalent of our military collection is greater. For example, a military tax of 4% is levied in Colombia and Sri Lanka.

In Ukraine, it is planned to increase the military levy, raising it to 5%

3% war tax is paid in Bosnia and Herzegovina, Cyprus, El Salvador, Croatia, 2% - Angola, Burundi, Guinea-Bissau, Eritrea, Egypt, Israel, Iraq, India, Mozambique, Nigeria, Nicaragua, Pakistan. Less than in Ukraine - 1% - the tax levy is levied in Ethiopia, Indonesia, Iran, Cambodia, Liberia, Libya, Mauritania, Morocco, Peru and Portugal.

And, of course, there are a number of states that do not charge such a fee. Ukraine is not one of them. As the head of the parliamentary committee on finance, Danil Getmantsev, recently explained, the authorities will be forced to increase basic taxes, including VAT, military duty and excise taxes, in order to find additional sources of funding for the army.

About individual entrepreneurs – “first”, “second” and “third”

Innovations await individual entrepreneurs as well. But they will begin to be implemented no earlier than 2025. At one time, fiscal benefits were introduced for them to support small businesses. Now they will be cancelled, because the development of entrepreneurship has dropped out of the top priorities. And, in fact, there was only one priority left - to protect the country and survive.

A simplified taxation system (under which entrepreneurs pay a single tax going to the local budget and a single social contribution) has been in effect since 1999. As practice has shown, such a system turned out to be attractive for small businesses, and now there are almost 2 million individual entrepreneurs working in Ukraine. However, “from the perspective of business taxation, the simplified system regime jeopardizes tax revenues and affects business decisions,” says the National Strategy developed by the Cabinet of Ministers.

Therefore, in the future, discount rates for individual entrepreneurs will increase.

In particular, the single tax for legal entities of the third group will gradually increase from 5% to 18%. The increase process will last three years, and after three years, legal entities will be prohibited from using the single tax at all.

And the second group, which now pays a 3 percent tax, will merge with the third group and will pay 17%. In this case, the rate will depend on the field of activity (traders will pay less, service providers will pay more).

As for the first group, the number of areas of activity will be reduced for it and the mandatory use of settlement transaction registrars (SRO) will be introduced.

At one time (in particular, in 2020), individual entrepreneurs protested against the mandatory introduction of cash registers. Now this requirement is becoming relevant again

For agricultural producers (legal entities), the single tax rates will be revised upward to 18% within three years.

One joy in all this is that you won’t need to register. This status will be granted automatically after opening a bank account “for conducting business activities.” And after the account is closed, the status of an entrepreneur will also be terminated.

Don't be single and multiply

The state needs money so badly that parliament recently witnessed an unpopular proposal. Servant of the People deputy Sergei Grivko came up with the idea of ​​taxing Ukrainians in amounts of 0.5% -1.5% of income if they have 0-2 children. Even amid current financial problems, such an idea caused outrage and brought to mind the infamous Soviet times when there was a tax for bachelors. As a result, Grivko withdrew his bill a few hours after its presentation.

Although calls for a tax on childlessness have been heard all over the world in recent years - from China and Latvia, the UK and Germany.

As for Ukraine, the Mikhail Ptukha Institute of Demography and Social Research says that in 2021, 1.2 children were born per woman. This is 45% below the level required to reproduce the current population. Now the indicator is already below one.

However, would a tax on childlessness help correct the situation in conditions where families are separated by war?

A similar experience took place in the USSR. There, childless men from 25 to 50 years old and childless married women from 20 to 45 years old must pay 6% of their income. This system lasted until 1991. Under independent Ukraine, they tried to return the childlessness tax in 2010 and 2012. The initiative was not supported then - no matter how supported it is now.

Did the tax on childlessness help fill the treasury if some Ukrainians (in particular, young and middle-aged women) are abroad?

Is there no Zrada?

And even without a tax on childlessness, the idea of ​​increasing the fiscal burden faced severe opposition. Especially against the backdrop of the recent increase in electricity tariffs, which have risen in price by 60%. President Vladimir Zelensky was reminded that in the summer of 2022 he signed a law banning increasing tariffs for heat and hot water for the population, and now, therefore, he has retreated from his intentions.

The authorities also blame the fact that the current team promised to reduce taxes before the 2019 elections, but now does not even intend to fix them at the current level. However, there is another point of view.

“In the history of the world, there has never been such a thing where a war of this magnitude lasted two years and the government did not raise taxes. It just wasn't there. War is very expensive. And war always leads to a dizzying drop in living standards. When the state takes more money from the population. And he cannot afford to spend on social support,” financial expert Sergei Fursa noted on his FB page.

His post turned out to be popular, and many people found his arguments convincing, although not very pleasant. The state restrained inflation for a long time and provided social benefits, but “the time came when there was no longer enough money.” And the government’s decision to increase taxes entailed an “infantile wave of discontent” because “populism is everything to us” and “we do not agree to grow up.”

“We continue to demand miracles. Keep taxes low. Low tariffs. And finance the war. It is advisable to hire 100,500 mercenaries to fight,” Fursa wrote indignantly.

We can agree with him, although there is another side to this coin. The already mentioned Ptukha Institute of Demography examined the standard of living of Ukrainians and published data according to which about 20 million of our citizens found themselves below the poverty line after the full-scale invasion of Russia, which is 67% of the population. It’s hardly fair for them to dismiss “infantilism” and reluctance to grow up.

Perhaps the authorities should have at least communicated their decisions to the people, especially if they are unpopular. So that arguments in their favor can be heard from the lips of officials. But with such communication, everything is still difficult for us - unlike the increase in taxes, it was not implemented by the decision of the Cabinet of Ministers.