Ukrainians Are to Be Taxed More — the Government Says There Is Not Enough Money for the Army. But Is This Really the Only Way?

In 2024, Ukraine may increase the rates of value-added tax (VAT) and military tax. And starting in 2025, according to the National Revenue Strategy, taxes will be raised for sole proprietors. The authorities claim that such unpopular steps are necessary to finance the Ukrainian army better, and the funds for its maintenance come from the state budget, which is formed from taxes.

Zaborona’s editor Svitlana Hudkova found out together with experts whether this solution is effective and what the alternative options for replenishing the budget are.

More tax collections: what is proposed by the Cabinet of Ministers

Officially, government members have not yet announced when and by how much taxes will increase. However, it is almost certain that the increase will take place in 2024. The government’s intentions were confirmed by Danylo Hetmantsev, MP from the Servant of the People faction and chairman of the Verkhovna Rada’s Tax Committee.

“Yes, we need to increase both the expenditure and revenue side of the budget to provide for the army, which we finance from our internal sources. We cannot borrow these funds from our partners,” emphasized the MP.

According to him, the government is currently calculating the needs, but it is already clear that they are significant — at least UAH 300 billion by the end of the year. Therefore, the Cabinet of Ministers is developing proposals on how to raise these funds. “But it is impossible to provide them bypassing the main taxes. Therefore, the changes will concern budget-forming direct and indirect taxes, including VAT, military tax, and excise taxes,” Hetmantsev added.

Currently, government officials are consulting with MPs and are expected to vote on the draft law to send it to the Verkhovna Rada for consideration.

Among the changes unofficially announced by the government, Ukrainians can expect the following:

• The VAT rate, which is currently 20%, may increase by 2–3%.
• The military tax is proposed to be raised to 5% instead of the current 1.5%. In addition, this tax is to be imposed on sole proprietors under the simplified taxation system.

These measures are expected to bring in about 190 billion hryvnias out of the required 300 billion to the state budget.

However, Yaroslav Zheleznyak, first deputy chairman of the Verkhovna Rada Committee on Finance, Taxation, and Customs Policy, told Ukrainska Pravda that no one can say which taxes will be raised, when and by how much.

“The parameters will be final after June. Why? Because first, the IMF Board of Directors must approve a decision on the fourth revision of the Extended Fund Facility program at its meeting in June, which will allow Ukraine to receive a tranche of $2.2 billion. Then the parameters of budgetary and tax changes will be formed. Before that, no one will give an answer [on tax increases] because it does not exist,” the MP said.

Taxes for sole proprietors from 2025

However, these are not all surprises for sole proprietors. According to the National Revenue Strategy for 2024–2030 approved by the government, starting in 2025, individual entrepreneurs will face a significant increase in the single tax — from 5% to 18%. However, the increase will be gradual — until 2027. In addition, the following changes will come into effect next year:

• There will be no need to register the sole proprietorship. This status will be granted automatically after opening a bank account with the status “for business activities”.
• The second and third groups of sole proprietors will be merged into one. These groups will pay taxes ranging from 3% to 17%.
• The number of areas of activity allowed for the first group will be reduced.
• For agricultural producers, the single tax rate will be revised upward to 18% within three years.

Tax increases will drive business into the shadow

Economic experts interviewed by Zaborona say that the measures taken and planned by government officials and MPs have both positive and negative aspects.

For example, Oleh Hetman, coordinator of expert groups at the Economic Expert Platform, and associate expert at CASE Ukraine, singles out the increase in excise taxes as a useful measure. As you know, the Verkhovna Rada has passed in the first reading bills to increase excise taxes on fuel and tobacco. Similar decisions on alcohol are also expected.

However, Illia Neskhodovskyi, Head of the Analytical Department of the ANTS network, notes that raising the excise tax on gasoline will lead to an increase in the costs for Ukrainian enterprises, which, of course, is a negative factor.

Among the initiatives implemented by MPs that have contributed to additional budget revenues, the economic expert mentions the increase in the bank profit tax. At the end of last year, the Verkhovna Rada raised the income tax that banks had to pay for 2023 from 18% to 50%. And starting in 2024, this tax was set at 25%. And, according to Hetmantsev, in 2023, banks paid a record 73.5 billion hryvnias in excess profit tax. This figure is twice as high as it has been for the previous 15 years.

An additional UAH 100 billion a year should be brought to the budget by a several percent increase in the VAT rate, says Oleh Hetman. In his opinion, although this will lead to higher prices of consumer goods, it will have a moderately negative impact on the economy.

Military tax for sole proprietors

What experts do not agree with is the increase in the military tax and the introduction of this tax for individual entrepreneurs.

“This proposal is counterproductive and should not be implemented, as it will only increase the already high shadow economy. In Ukraine, about 30% of salaries are gray. And such a decision will encourage even more active shadowing of sole proprietors and employees,” Hetman said.

Neskhodovsky considers the increase in income taxation to be one of the worst impacts on the economy. However, if the military tax is raised, it should be at least differentiated, depending on the size of the salary.

“As for sole proprietors, I absolutely do not support such an increase for Ukrainian producers, small businesses, and trade. The only way to implement this additional fee is for those who provide services. 5% will not be critical to increase their cost,” the expert added.

According to Mr. Hetman, MPs are currently waiting for reasonable proposals from the Ministry of Finance, but the Tax Committee of the Verkhovna Rada does not support this particular configuration of tax increase. Therefore, the bill is not likely to be passed in this form, the economist believes.

Taxes may not be raised in case of…

…rebooting the State Tax Service, the State Customs Service, and the Bureau of Economic Security. Oleh Hetman notes that the budget loses about 250–300 billion hryvnias a year from the largest schemes of the shadow economy. Therefore, the reform of these bodies should minimize losses.

“We need not cosmetic reforms, but a complete reboot, following the example of NABU (National Anti-Corruption Bureau) and NAPC (National Agency for the Prevention of Corruption). With the involvement of international experts who will have a decisive vote,” the economist believes.

MPs voted for the draft law on rebooting the BEB (Bureau of Economic Security) in the first reading back in April. The government’s version was criticized by anti-corruption activists and international partners, so many amendments are expected for the second reading. However, consideration of the draft laws on tax and customs is not progressing.

An additional half of the necessary funds can be raised by increasing import duties. In this case, there will be no need to raise taxes for the population.

“In addition to increasing revenues, this will have a positive impact on Ukrainian producers, who will be able to gain a certain price competitive advantage. Therefore, this decision should be considered first, but for some reason, it is not,” summarizes Illia Neskhodovsky.