Ukraine ministry proposes cutting VAT to 9%, introducing turnover tax

Ukraine’s Ministry of Revenues and Fees posted on its website a bill that proposes cutting Ukraine’s VAT rate to 9% (from 20% currently) starting Jan. 1, 2014 with the simultaneous abolition of all VAT privileges. To compensate for the resulting budget revenue declines, the bill suggests introducing a turnover tax at a 1-2% rate. Authorities estimated the measures will generate UAH 22 bln in extra revenue, presumably in 2014.

Alexander Paraschiy: This initiative clearly shows that Ukraine’s public finances are in trouble. In a program developed in 2010, the administration of President Viktor Yanukovych promised to cut the VAT rate to 17% (from 20%) in 2014, which could have been a successful economic policy before the October parliamentary elections. But instead, the Ukrainian economy is in recession and budget revenues are falling. Against this backdrop, it’s a typical reaction by the government of Prime Minister Mykola Azarov to suggest a compensating mechanism that increases the tax burden by UAH 22 bln instead of reducing it.

Indeed launching a turnover tax – in addition to the existing VAT – promises a lot of trouble for the real sector. Firstly, there will be more tax pressure on an already depressed economy. Secondly, a turnover tax would significantly increase costs for downstream businesses (that create high value-added products). Thirdly, the very administration of one more large tax will add to administrative costs of mid-level businesses. If parliament approves this bill, we expect the Ukrainian economy to sink deeper into crisis. Yet we see a low probability of that happening.