Tax Increase. Who Will Pay the Most and Are There Alternatives

At its meeting, the Verkhovna Rada of Ukraine adopted draft law No. 11416-d on raising taxes. It is worth noting that 241 People's Deputies voted for the implementation of this innovation.

The draft law was adopted on the Day of Saint Sophia, mother of Faith, Hope and Love. Taking into account the fact that the increase in taxes will affect every working Ukrainian, all of us can only believe that these taxes will be collected from the economic sphere of the country, hope that they will be transparently and efficiently spent, and... to love People's Deputies for such "wise" decisions.

Let's move on to the draft law itself, which, in particular, provides:

• to increase the rate of military levy on the income of individuals from 1.5 to 5%. These are, in particular, income in the form of wages and interest on deposits in banks, that is, the most common incomes of the population in the country;
• establish a military levy in the amount of 1% of income for taxpayers of the third group of uniform tax;
• establish a military levy for individual entrepreneurs, namely taxpayers of the single tax of the first, second and fourth groups at the level of 10% of the monthly minimum wage;
• set a 50% income tax rate for banks for 2024;
• set the base rate of corporate income tax for the purpose of taxing the income of non-banking financial institutions (except insurers) at the level of 25%;
• introduce a new mechanism of advance payment of income tax for enterprises engaged in retail fuel trade (so-called advance payments for each gas station by fuel traders).

It was not without fiscal euphemism or camouflage of the negative theme of increasing the fiscal burden on the income of the population. In particular, the explanatory note to the draft law stated:

"In addition, it is proposed to provide an instruction to the Cabinet of Ministers of Ukraine to develop a draft law on amendments to the Budget Code of Ukraine regarding the crediting of revenues from the military levy to a special fund of the State Budget of Ukraine in order to direct them to the needs of financial support of the security and defense sector."

The last short story needs to be explained a little. Usually, the military levy is a kind of quasi-tax on income, it does not differ in its essence from the personal income tax (PIT). The latter is now 18%, and the military levy before the adoption of this law was 1.5%. Of course, it was possible to simply introduce personal income tax (PIT) at the rate of 19.5%. That would be easier for all taxpayers, but the very name "military" serves as a euphemism that softens the toxicity of the subject of additional taxes in the collective consciousness.

At the same time, the sums of the military levy paid by taxpayers go to the general budget cauldron, or rather, to the treasury account, where these payments are dissolved in the flow of other taxes and fees. And therefore, purely formally, there is still no target principle of using the military levy for the needs of the Armed Forces of Ukraine.

Theoretically, these funds can be directed to roads and a new car for the minister. Paradoxically, since the introduction of this tax, neither the government nor the People's Deputies have been able to make the necessary changes to the Budget Code of Ukraine, according to which the military tax would go directly to the army, and not to the pockets of officials.

They did not do this even now, even against the background of an increase in the military levy more than three times, from 1.5 to 5%. However, even the People's Deputies themselves understood that this whole story should be covered up with some good intentions, which they successfully did. The People's Deputies manipulated by "instructing the Government of Ukraine to develop the necessary changes regarding the creation of an appropriate target budget fund for the accumulation of funds in the form of a military levy."

How much time will the government need now to develop a draft law on A4 paper as part of a legislative initiative? It is likely that the war may end sooner, and then the military tax will be replaced by a "recovery tax", and again without a target principle and a special accumulating fund.

But let's return to the adopted changes. In general, the tax innovations listed above can be divided into two main groups.

The first group is labor taxes in the form of a military levy, which increased from 1.5 to 5%.

The second group is business taxes. Individual entrepreneurs of the third group received an additional percentage to the tax rate of their incomes. Now it is 5% of the uniform levy and 1% of the military levy. In general, this is 6%.

Individual entrepreneurs of the first and second groups will pay a military levy in the amount of 10% of the minimum salary, or UAH 800. Whether this will lead to shadowing of entrepreneurial activity, we will see soon.

Among the most successful innovations is the increased tax on excess profits of banks. Although for this tax, the most adequate of all, a real battle between the lobbyists of the banks' interests (the National Bank of Ukraine (NBU) and the Ministry of Finance of Ukraine) and some People's Deputies took place. They perfectly understood that imposing a new tax on the income of a cleaner in a supermarket and at the same time NOT imposing an additional tax on the historically record surplus profits of the banking sector (forecast of UAH 100 billion according to the results of 2024) is a striking injustice, which may well demotivate the population to pay any taxes from their already not so large incomes.

In simple words, if 18% of the income tax, 5% of the military levy can be withheld from the salary of an ordinary Ukrainian, and 22% of the Single Social Security Tax (SSST) can be added to the wage fund, so why can't the banks that received record excess profits in 2024 pay 50% of them in one go?

Moreover, this is a kind of income tax, the appearance of which is quite unfounded, no one can clearly explain where they came from. Over two and a half years, the National Bank of Ukraine, with the help of state resources, paid UAH 220 billion to banks for their deposit certificates. This is a pure subsidy paid by the state in favor of banking structures at a rate that in the first year of the war reached 25% per annum based on three-month certificates of the National Bank of Ukraine (NBU). Moreover, 60% of these revenues were transferred to commercial banks, which in the structure of the banking system occupy 40%.

In fact, such pumping of interest income to banks is a hidden subsidy of inefficient management and fuel for the burning of problem assets in the form of bad loans (and a significant part of these loans was insider, although it was not officially classified as such). Banks are now massively forming reserves for bad debts due to interest income.

By the way, the income tax, the origin of which no one can clearly explain, it is also called the windfall tax or the tax on excess income, was applied in Britain by the Labor government of Tony Blair in 1997.

It is clear that during the war in Ukraine, the number of businesses with incomes whose origin no one can clearly explain and which are called the windfall taxes decreased. But they still exist in our country. Among them are such structures as banks, gambling business, grain trading in ports, production of alcohol, cigarettes and private energy business.

So far, the windfall tax has been introduced only for banks, thanks to which the budget will receive an additional up to UAH 30 billion. They can be spent on the defense sector of our country.

In addition, it is worth noting that even more funds can be brought by the streamlining of tax collection at customs and the systematic restart of taxation of export operations.

Ukraine is an export, raw material economy, at the same time, export duties bring to the budget up to UAH 500 million on average, which is an absolute fiscal misery. In fact, these are residual duties on sunflower seeds and scrap metal.

If there was a national reserve fund in Ukraine, where raw material duties from exports would be accumulated, then the application of an average rate for the export of raw materials and semi-finished products of 5% would bring the state more than 30 billion dollars. (for the period since 2010). In reality, these funds ended up in the pockets of several Financial and Industrial Groups (FIG). On the eve of the war, big business took almost $20 billion out of the country due to the receipt of raw material revenues, despite the fact that the reserves of the National Bank of Ukraine (NBU) were then reduced to $25 billion.

Even now, the application of a duty on the export of raw materials in the amount of 3% can bring to the budget up to UAH 40 billion per year. And these funds will not be paid by producers of raw materials, but by traders who have monopolized access to ports and receive excess profits due to this.

Another source is the gradual abolition of the preferential zero of the value-added tax (VAT) rate for the export of raw materials.

This compensation in 2023 almost returned to the pre-war level and amounted to UAH 131.6 billion (in the first year of the war — UAH 84.38 billion). A significant part of these funds went to resellers, not manufacturers, and some of these funds went to front companies.

For example, before the war, agricultural enterprises in Ukraine provided 17% of exports, but received only a little more than 2% of the value-added tax (VAT) rate refunds, while trade enterprises, which accounted for 0.1% of exports, received almost 28–30% of budget refunds.

That is, up to 20% of the value-added tax (VAT) refunds can be attributed to gray and shadow schemes, which is up to UAH 30 billion per year.

This happens, in particular, due to the "assembly" of large trade networks and the export of agricultural raw materials into a single business model. A significant number of owners of large retail chains in Ukraine are also engaged in the agar business.

This opens up unique opportunities for "overturning" of the value-added tax (VAT): importing products for its retail networks, the specified business pays of the value-added tax (VAT) to the state on the value of imported products. Then part of the production is sold for cash or "gray" checks. To legalize the sale, the products are sold to front companies, to which the generated tax credit is transferred. This tax credit is then transferred to the own agricultural export companies, which receive the value-added tax (VAT) from the state.

The preferential rate regime for the export of agricultural raw materials has not supported farmers or sole proprietors in our country for a long time. This happened precisely because neither the first nor the second have a large "input of the value-added tax (VAT)" for the formation of a tax credit (only for the amount of the purchase of fertilizers and fuel). Moreover, as a rule, such agricultural producers are subject to a single tax and are not value added tax (VAT) payers.

Instead, grain and other agricultural raw materials are bought from agricultural producers by intermediaries who create a fictitious tax credit due to the fact that they buy real grain from farmers for cash, and "legal" grain, the purchase of which is recorded only on paper, from front companies that transfer their tax credit to them. As a result, the state receives refunds of the value-added tax (VAT) worth billions of UAH.

Therefore, only the reboot of the raw material export taxation model can bring up to UAH 80 billion per year to the budget.

However, the People's Deputies took a different path, namely they decided to pluck a goose that no longer has feathers or down.