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The government has discussed the possibility of raising taxes to cover the budget deficit. The changes would affect VAT rates (increased by several points) and the military levy (up to 5%). While the figures are not yet final and the bill is still in development, the business sector has already noted that this could negatively impact entrepreneurship and may not achieve the desired result.
The Ukrainian League of Industrialists and Entrepreneurs (ULIE) points out that such a scenario will undoubtedly increase business costs:
- Increasing VAT rates directly raises the cost of goods and services for end consumers, which may lead to a decrease in demand.
- Raising the military levy to 5% will also increase the tax burden on business income, affecting their profitability.
The ULIE and the Crisis Economic Stability Task Force under its aegis conducted their calculations. With a VAT increase of 2-3 percentage points (e.g., from 20% to 22-23%), additional costs for businesses could reach tens or even hundreds of millions of hryvnias, depending on sales volumes.
Introducing a 5% military levy would result in businesses having to pay significantly more to the budget. For example, if a business has an income of 10 million hryvnias, at a 5% rate, it would need to pay 500 thousand hryvnias additionally, compared to 150 thousand at a 1.5% rate.
For sole proprietors (FOPs) paying a single tax of 5% on income, the introduction of an additional military levy would increase this burden to 10%. Thus, small entrepreneurs should be prepared for doubled tax expenses. If a FOP has an income of 1 million hryvnias, the additional 5% military levy means paying another 50 thousand hryvnias, which could be a significant burden for many small entrepreneurs.
"Increasing taxes can lead to reduced profitability, decreased investments, and potential layoffs. It may also reduce the competitiveness of Ukrainian goods and services due to rising prices. While it is understandable that the state is currently looking for additional funding sources, especially for defense needs, the mechanism of increasing revenues through tax hikes seems illogical, to say the least," emphasizes the ULIE.
On average, the income of Ukrainian enterprises has halved compared to the pre-war period, according to a World Bank study published earlier this year. Due to Russian aggression, about 20% of Ukrainian businesses faced destruction, while 70% lost income. Some industries have been critically affected by the war: for instance, the metallurgical sector has lost up to 60% of its capitalization.
Moreover, Ukrainian entrepreneurs have limited opportunities to replenish working capital, making it challenging to invest in rebuilding or modernizing production. The "Affordable Loans 5-7-9" program is insufficient to meet the credit hunger of businesses (according to ULIE surveys, about 60% of companies cannot afford commercial loans).
Tax increases will lead to higher prices for goods and services. Given the low purchasing power of the population, this could reduce demand for domestically produced value-added goods or lead to further substitution with cheaper imports. In such a scenario, a decrease in overall production and sales volumes due to reduced demand could negate the expected additional revenues.
Due to significant damage to the energy infrastructure, there are already announced increases in electricity tariffs, and industrial consumers face consumption restriction schedules. These factors also significantly affect business and its competitiveness.
"We believe that the issue of raising taxes should be discussed in a Government-Parliament-Business triangle, as stipulated in the joint Statement of the Government and business organizations of Ukraine. To minimize negative impacts, it is crucial to develop compensatory mechanisms to support small businesses and ensure economic stability. The issue of tax increases is debatable," said Anatoliy Kinakh, President of the ULIE.
At the same time, businesses unanimously agree on the urgent need to increase defense spending. Where to find the funds? First, the "Made in Ukraine" initiative should be implemented and national producers should be actively supported (through government tenders, information campaigns, export promotion). Increasing tax revenues by boosting business profits is the optimal path.
Second, together with the NBU and the Government, efforts should be made to increase business lending programs by commercial banks. Currently, financial institutions profit from NBU deposit certificates and government bonds and are not particularly interested in providing competitive loans to entrepreneurs.
Third, the state should conduct a strict audit of state budget expenditures, including local self-government bodies. Paving stones and stadiums are good, but not during wartime. All freed funds should be directed to the defense sector.
Fourth, if taxes are to be raised, the economic impact and risks should be calculated, agreed upon with businesses, and compensatory measures proposed simultaneously.