The threat of closing thousands of businesses and rising prices: why the introduction of VAT is dangerous for individual entrepreneurs
6 December 17:01
ANALYSIS FROM 
The government plans to introduce changes to the simplified taxation system for individual entrepreneurs to pay VAT when exceeding a certain limit in 2027. There is no way to avoid this, as it is another IMF requirement, and Ukraine has managed to bargain for a year to prepare individual entrepreneurs for this unpopular measure, which should help fill the state budget. If this is done, how will it affect the country’s economy and the wallets of ordinary Ukrainians, "Komersant Ukrainian" found out.
The point is that one of the IMF’s requirements as part of the agreement on a new $8.1 billion financing program was to introduce VAT for individual entrepreneurs with an income of more than UAH 1 million. All entrepreneurs, except for those in the first group, had to become taxpayers, which caused a negative response among entrepreneurs.
It turned out that every individual entrepreneur with an annual income of more than one million hryvnias, which is approximately 83 thousand per month, would have to become a VAT payer.
The other day, MP Ihor Friz said that it had been decided not to discuss the issue of individual entrepreneurs and VAT at all and to remove it from the agenda.
“There are definitely no votes for this. And the government will look for other sources of budget revenues,” Mr. Friz said.
In an interview with journalists, Finance Minister Sergiy Marchenko said that the task is to level the playing field for the simplified taxation system and VAT payers, to set common limits for these groups of taxpayers.
Mr. Marchenko emphasized that it is impossible to avoid changes in the simplified taxation system, and the discussion with the IMF on this issue was not easy. According to him, entrepreneurs will have time – there will be a transition period until 2027, and maximum explanation of the logic and reasons for such a step.
“I don’t think this is a surprise. If you look at the plans that the Ministry of Finance has been preparing for years, they also included this provision. Such measures are not popular, but they are important. And during this period, we had no room for a negotiating maneuver to remove them from the discussion,” the minister said.
Analysts believe that it is not necessary to start with individual entrepreneurs
Analytical centers specializing in economic policy estimate that in 2024, more than 644 thousand individual entrepreneurs were registered in Ukraine as single tax payers with income over UAH 1 million. If we imagine that all of them will become VAT payers, this will create an additional burden on the VAT administration system, require hundreds of thousands of accountants who do not exist, and this will lead to an increase in the operating costs of microbusinesses. And all this, in turn, will lead to a financial burden on the population.
According to analytical centers, such a decision would result in a loss of public welfare of UAH 150-180 billion, or about 1.5-2% of GDP. At the same time, experts estimate the total budget losses from abuses of the simplified taxation system at UAH 10-13 billion per year.
“In fact, such a decision will lead to the closure of most individual entrepreneurs, the growth of the shadow economy and corruption. Some highly qualified personnel are likely to leave the country in search of better conditions abroad, where they will be able to enjoy much better living conditions and security under similar taxation conditions,” the analysts state.
What analysts suggest:
Set a reasonable threshold for the transition to VAT, taking into account the burdensome nature of the Ukrainian system (in the EU and the UK, the threshold is 85-100 thousand euros).
First, close down large tax evasion schemes that cause huge losses to the budget:
- Informal employment: 200-265 billion UAH/year
- “Gray imports”: 105-120 billion UAH per year
- Excise tax evasion: 39-43 billion UAH/year
- Business fragmentation and disguising employees as private entrepreneurs: 26-32 billion UAH/year
Putting pressure on microbusinesses without eliminating systemic loopholes is a strategic mistake that will increase shadowing and corruption. The reform should be implemented in a balanced and phased manner, analysts conclude.
The introduction of VAT will affect services and prices for Ukrainians
Individual entrepreneurs are not created to pay taxes. The system of individual entrepreneurs exists all over the world to relieve the central and regional budgets of the costs of maintaining the unemployed and to create jobs. This is the main purpose of the simplified business system, says economic expert Yuriy Havrylechko. “In Ukraine, individual entrepreneurs save the state budget about UAH 200 billion annually, which would otherwise have to be paid in the form of unemployment benefits. And if you calculate how much value added they create, you will get at least half of the 200 billion, the expert emphasized.
“If Ukraine introduces VAT for individual entrepreneurs, someone will go into the shadows, and someone will close down. In any case, the quality of services provided will deteriorate, prices will rise, and all this will lead to a reduction in the number of specialists who will leave. The fact is that there is no alternative to individual entrepreneurs in the service market. Ukraine will gradually move closer to Europe, which means that services will be worse, more expensive, and less accessible. For example, you will have to wait for a plumber for weeks or even months, and God forbid that his work is done well. It’s like in Europe now,” emphasizes Mr. Havrylechko.
“One million hryvnias in dollars is less than 25 thousand. That is, about 2 thousand dollars a month gross. For a business, this is not money, and for a self-employed person, this is a small income. Moreover, this profit still needs to be used to pay for rent, utilities, such as electricity, water, etc., and to buy the necessary equipment, materials, food, etc. An income of a million implies spending a significant part of this million. In most countries, individual entrepreneurs do not pay any tax at all up to a certain amount. But we have a targeted policy of monopolizing the market and trying to free up labor for large corporations. And these corporations do not want to pay decent wages, and in this case, no one will work for them, people will simply leave.
Author: Alla Dunina
