The income tax on military personnel, as well as the amount of their salaries, became a hot topic of programmes and discussions in the media and social networks. However, the question of this tax shifted the focus of the discussion from the Government to the communities, as they seem to be not helping or not helping enough to the Armed Forces of Ukraine.
We should pay tribute to officials who have real data and do not participate in public discussions. After all, those who know the budget legislation and have real data will not manage to justify the withdrawal of personal income tax (PIT) from local budgets.
In particular, the Ministry of Finance issued clarification No. 05130-14-5/16317 dated 15.06.2023, in which the purchase of aid from local budgets for the Joint Forces units of the Armed Forces of Ukraine is called illegal. The State Audit Service of Ukraine also gives negative comments on the use of community funds for defence. Only now, however, Draft laws No. 9559-d and 9560-1 have been registered, which are intended to legalise municipal expenditures on defence and enable communities to help the military without criminal liability.
Let us justify with figures and the law why community support for the defence forces should be legalised and why communities should continue to receive 64% of PIT, including tax on military personnel's salaries.
The Association of Ukrainian Cities received detailed data from 754 communities out of 1470 – a sample of over 50% including all regional capitals which are currently under the Ukrainian control.
The military PIT of these communities as of 2022 and the plan for 2023 will total UAH 116.72 billion (according to the official state portal “Open budget” for all communities, the total amount of military PIT for 2022-2023 will be UAH 128 billion).
Meanwhile, cities, villages and settlements have contributed to approximation of Ukraine's Victory by helping the Joint Forces of the Armed Forces of Ukraine, directly allocating, as of today, UAH 28.7 billion, including direct financial assistance of UAH 14.8 billion, purchase of equipment and machinery worth UAH 7.04 billion, investment of funds from village, settlement and city budgets in the purchase of military government bonds worth UAH 6.15 billion, and allocation of UAH 0.71 billion for the construction of military defence lines.
These are funds transferred by local governments without updated legislation, despite the fact that law enforcement agencies open criminal proceedings for misuse of funds in all cases.
Additionally, due to the hostilities, UAH 8.99 billion was spent on building and repairing shelters, UAH 10.76 billion on urgent repairs of infrastructure destroyed by shelling, and UAH 3.83 billion on housing for internally displaced persons. Therefore, the total expenditures from community budgets related to security and defence amount to UAH 52.28 billion. And these are only direct transfers from local budgets, without charitable, sponsorship and donor funds for fuel, firewood, spare parts and drones.
According to the Ministry of Economy, local governments have bought more than UAH 1 billion worth of drones through Prozorro alone.
Hence, here is the first conclusion
Even without legislative support, communities, contrary to the position of controllers and law enforcement officers, have already transferred more than 45% of the military PIT received by local budgets to security and defence.
All these expenditures are transparent, with requests from the military and confirmation from them. These expenditures are constantly monitored by a number of government agencies and can be found by any journalist or active community member. Moreover, they are constantly monitored by the State Treasury before they are paid.
So, where are the funds of the other part of PIT that is credited to the state budget?
It is known that the budgets of all communities, except Kyiv, receive 64% of PIT and are accountable for every hryvnia at all stages.
Where is 36% of PIT paid by citizens from all over Ukraine, except Kyiv? And where is 60% of the personal income tax paid by the residents of Kyiv?
Unfortunately, even the temporary investigative commissions of the Verkhovna Rada of Ukraine do not answer these questions, because state funds for defence are a secret. And this is reasonable.
The second conclusion
The funds of villages, settlements and cities are much more open to control by both citizens and controlling units, and therefore less corrupt.
When Ukraine can only allocate funds for defence from its own taxes, which are only 31 kopecks per hryvnia, resources should be directed through those bodies that have the greatest transparency and accountability, and these are local governments.
However, there are also expenditures that communities do not account for separately, but do make.
This includes treatment of the wounded, especially in frontline communities where specialised hospitals are available only in regional capitals and where no one can provide figures.
This includes ongoing assistance to military personnel who move or are stationed in communities.
This includes rehabilitation of veterans, their socialisation and their return to life.
These include the families of the military who live at the frontline in their hearts, but physically need kindergarten, school, work, aid...
As an example, by Resolution No. 547 of 01.06.2023, the government established free meals for 1 million 640 thousand children affected by the hostilities, but as usual, did not allocate UAH 28.7 billion for this purpose, which will be provided from local budgets over the next two years.
Will communities stop doing all this without military PIT? Of course not!
Will the state do this by taking away people's tax? Unfortunately, no.
Therefore, here is the third conclusion
PIT is not a targeted contribution; it is a tax on individuals to provide the services they need from the government.
Military personnel, police officers, and emergency service personnel protect us with their lives, but they do not quit being human beings.
All people, even the strongest, need to be sure that their families are protected and receive the necessary services and assistance. Military PIT should ensure proper living conditions for their relatives, parents and children. The state and local governments should provide the military with rear support.
Thus, communities do their best to ensure that residents receive all the necessary services. Even if it is the state's responsibility and it does not finance them.
In 2022-2023, 754 local governments spent UAH 27.2 billion without compensation from the state budget to ensure the delegated powers, including UAH 5.23 billion to pay healthcare workers, UAH 4.51 billion to cover the deficit of the educational subvention, UAH 9.59 billion for subsidised transportation, and UAH 7.87 billion for the maintenance of vocational schools.
Separately, local governments spent UAH 62.4 billion of their own resources to support critical infrastructure enterprises and hold down heat and water tariffs for citizens. But for the military PIT, the communities might not have survived the winter, since they have financed the preservation of heat and water supply companies and are now preparing them for a new heating season.
The fourth conclusion
The state fails to fulfil its obligations to citizens as defined by law. This is done by local governments using funds received from taxes. The withdrawal of funds from community budgets does not provide for the state to identify any sources to finance the expenditures stipulated by law, and thus will lead to the collapse of vital service delivery systems for residents of all territories.
What is more, the state, by Law No. 3050-IX of 11.04.2023, withdrew UAH 13.26 billion from the de-occupied communities and those located in the combat zone for 2022.
Direct security and defence expenditures, expenditures due to military aggression, delegated powers and tariff restraint covered by local budgets, as well as the balances on the accounts of 754 communities as of 31 December 2022, amount to UAH 207.66 billion. However, military PIT is planned to be UAH 116.72 billion over two years.
As of 31.12.2022, the balances on the accounts of communities amounted to UAH 65.78 billion. These are funds that were received from taxes (including military PIT), but were not used due to the lack of possibility to allocate funds for defence (we are waiting for the adoption of Draft laws No. 9559-d and 9560-1) and due to restrictions on the use of funds introduced by the Cabinet of Ministers' Resolution No. 590 on 24 February 2022. Not a single payment from local governments since the beginning of the full-scale invasion has been made without prior control of the State Treasury!
The funds stayed in the state's possession, covered the state account deficit, and were "burned" due to unused funds.
This is exactly how the military personal income tax can "burn up", "collapse", if it is withdrawn from local budgets.
This is because the tax is actually paid not by the military but by the state budget in accordance with the Procedure for Payment of Monthly Cash Compensation of Personal Income Tax Amounts Withheld from Cash Allowances, Remuneration and Other Payments Received by Military Personnel, Police Officers and Rank and File Personnel, approved by Resolution of the Cabinet of Ministers of Ukraine No. 44 of 15 January 2004.
If the military PIT had not been paid to community budgets in 2022-2023, no one would have known about the use of these funds, just as no one knows about the rest of the PIT on military personnel. And this is UAH 116.72 billion, which communities have used in full to help the security and defence forces and to provide services to the families of military personnel.
The fifth conclusion
Removing the military PIT will weaken communities, deprive them of the opportunity to help the defence forces and provide quality services to residents, but will not create any benefits for the Joint Forces of the Armed Forces of Ukraine, since the funds will dissolve into the state budget, similar to 36% (60% from Kyiv) of the current PIT, which is managed by the Ministry of Finance.
When the Ministry of Finance writes that military PIT increased after 24 February 2022, it does not mention that since that day the number of military men has increased by 700,000 at the expense of civilians. Before mobilisation, all those who now pay military PIT paid PIT to the community from the salaries of teachers, shopkeepers, workers, employees, real estate tax, and a single tax on business activities. Today, these taxes are not available, but there are people. Unfortunately, the number of people in Ukraine has not increased, they have temporarily changed their profession and taken up arms to defend Ukraine. After our Victory, they will return from the war to the communities that are now helping the Ukrainian defenders with everything they can, and in a completely transparent way.
Before drawing a general conclusion, let us look at the losses incurred by 754 communities as a result of the aggressor's actions in the amount of UAH 815.61 billion and the assistance received by communities from the state budget in the amount of UAH 6.83 billion to rebuild these facilities.
Does the state have enough money? No.
Will there be more money if military PIT is taken away from local governments? No.
It is necessary to help those who work, who have been financing defence and protection since the first day of the war, who have used 64% of PIT transparently, to do everything possible to increase the funds for the security and defence forces and local governments.