Tax hike: why President Zelensky postpones signing the new law
26 November 2024 19:54
ANALYSIS FROM 
The draft law on tax increases for most Ukrainians has been awaiting President Volodymyr Zelenskyy’s signature for more than 40 days. The document was adopted by the Verkhovna Rada in the second reading on October 10. A tax increase in Ukraine has been almost inevitable since the end of 2023, but the authorities have been delaying this decision for a long time.
Only in the summer, the Ministry of Finance presented a proposal to increase the military tax on personal income and introduce other additional fees. However, the government’s initial idea was rejected by MPs, who proposed instead to raise the payroll tax and re-tax bank profits at a higher rate of 50%.
Why is Zelenskyy hesitating so long?
In an exclusive commentary for "Komersant Ukrainian", Oleh Hetman, coordinator of the Economic Expert Platform, shared his assessment of the draft law that provides for a tax increase for most Ukrainians. According to him, this is a complex decision that has two sides. On the one hand, of course, we need funds for the army and defense, so the principle of the bill is relevant and necessary. However, according to the expert, there are also problematic issues. One of them is a strict provision that provides for taxation of 50% of all bank profits for the last quarters.
“Banks are powerful players who have their own lobbyists, including in the Cabinet of Ministers and the IMF. The IMF has already expressed concern about this, although it has not yet banned such a step,” explained Hetman.
In addition, he drew attention to the fact that at the time of drafting this bill, it was not clear whether the $50 billion project that Ukraine was supposed to receive for financing would be implemented. According to Hetman, this project has now been almost approved by the Cabinet of Ministers and the implementation of these funds may take place in the coming months. This is what influences the decision on taxes. So, whether it is necessary to sign the bill and raise taxes, Hetman said that it all depends on whether these funds are received.
“If the $50 billion actually comes in early next year, then we don’t need to raise taxes at all. This is the amount equal to all the taxes we collect in a year,” he said.
Tax hike to be, but on one condition
But if these funds are delayed, then, according to the expert, a tax increase will become necessary. However, he offers an option that, in his opinion, is less harmful to the economy. It is worth noting that Hetman opposed raising taxes for employees and individual entrepreneurs, suggesting that this should be replaced by a VAT increase. According to him, such measures could be more effective.
“Instead of raising the military tax to 5%, it would be better to temporarily raise VAT to 22%. This is a less harmful indirect tax for the economy, which has less impact on businesses and citizens,” the economist said.
Meanwhile, economist Danylo Monin told KU that raising taxes is always an unpopular step for the authorities and is usually taken only under pressure.
“Initially, Marchenko, Hetmantsev and Pidlasa convinced us for a long time that there was no money for the war. But it was not true. This year’s budget deficit is expected to be at the level of 2023 in hryvnia, while tax revenues will be UAH 500 billion higher even without a tax increase,” Monin says.
A new source of funding may appear in Ukraine
The expert also emphasized that this year a new source of budget financing has emerged – the World Bank. According to him, the total amount of funding for Ukraine from the West has increased from $38 to $41.4 billion, which is enough to finance the budget. Therefore, there is enough money for this year to avoid raising taxes. As for the budget for 2025, the economist said it was adopted with an increase in taxes, including excise taxes on cigarettes (which have not yet been voted on in the second reading). However, the situation with financing has improved significantly.
“The G7 promised us $50 billion in grants at the expense of frozen Russian reserves in Europe. This means that there is no need to raise taxes at all, because these $50 billion are UAH 1,700 billion, which is more than the budget deficit in 2025. This will make the budget deficit-free,” Monin said.
He also added that it is high time to stop taking loans from the IMF at 8.5% per annum, which is a very expensive loan when Europe provides loans at 0%, the US provides grants, and Canada provides loans at 1.5%, not to mention Japan, which provides grants and loans at 1-2%.
It is worth reminding that the process of adopting amendments to the Tax Code began in the summer of 2024, when the Ministry of Finance presented the first version of the changes. It included a number of controversial proposals, including additional taxes for mobile operators, a military tax on jewelry, a 1% business turnover tax, and higher taxes on international parcels and car purchases. These ideas were not supported by businessmen, MPs, or representatives of the President’s Office, which led to the failure of the vote in parliament. As a result, the government had to finalize the draft law together with MPs to reach the final version of the document.
Author – Daryna Glushchenko
