ZELENSKYY THE GREAT PROCRASTINATOR

Great procrastinator. 

Why Zelensky postpones raising taxes

Yaroslav Vinokurov — November 26, 09:00 

The president says he does not notice the deficit of the state budget. To cover it, you need to raise taxes. If this is not done, the country risks reducing some of its defense spending.

More than 40 days on the signature of President Vladimir Zelensky is waiting for a tax increase for most Ukrainians. This document is a parliament approved in the second reading on October 10. 

• Tax increases in Ukraine seemed inevitable from the end of 2023, but the authorities postponed the decision until the latter.

Only in the summer did the Ministry of Finance come up with a proposal to introduce an increased military tax on citizens' incomes and a number of other additional fees. The government's initial idea was rejected by lawmakers, proposing instead to raise the payroll tax and re-tax banks' profits retrospectively at a rate of 50%.

According to EP interlocutors among government officials responsible for economic issues, these changes were agreed by Zelensky. However, even this did not save the object of the historical increase in taxes from the historical delay with the signing. 

Why is the president postponing the signing of the tax law and will he sign it at all?

That changes the law
The epic with the adoption of amendments to the Tax Code lasted from the summer of 2024, when Minfin announced the first option changes. 

• It contained a number of proposals: from additional taxation of mobile operators to the introduction of a military fee for jewelry; from the introduction of a business turnover tax of 1% to the increase of taxes for international parcels and purchase cars.

Such ideas were not supported by businessmen, deputies or officials of the President's Office. Not surprisingly, the parliament failed the vote fortortect, and the government had to finalize it together with the deputies in a short time.

Read also: We need to finance the war. What taxes will increase

The final package of tax changes, for which the Verkhovna Rada voted on October 10, turned out to be much more modest. In particular, it included such proposals.

1. Increase of military collection from the salaries of physoids (including members of the "Action. City" regime) from 1.5% to 5% – from the date of entry into force of the law. Exception – servicemen (1.5% left).
2. Increase from January 1, 2025 of the military collection from other income of citizens (except salaries) from 1.5% to 5%.
3. Introduction of a military fee of 10% of the minimum wage (currently – UAH 800) for entrepreneurs of the first, second and fourth groups.
4. Introduction of a military fee for FOPs of the third group in the amount of 1% of income.
5. Increase in the income tax rate for 2024 for banks from 25% to 50%. As they have already paid taxes at the old rate for most of this year, the new tax is introduced retrospectively ("retrospectively").
6. Increase of the income tax rate for non-banking financial institutions (except insurance companies) from 18% to 25% from January 1, 2025.
7. Introduction of monthly advance payments on income tax for gas stations: UAH 30, 45 or 60,000 for each station, depending on its type. The amount of overpayments will not be taken into account to reduce tax liabilities in the future.
8. Introduction of an advance income tax contribution for currency exchange points in the amount of 700 euros for each exchange point in Kyiv, 600 euros – in cities with a population of more than 50 thousand people, 200 euros – for other settlements.
9. Introduction of a minimum land tax of UAH 700 and UAH 1,400 per hectare.
10. Introduction of monthly reporting on PIT, military collection and single social contribution from January 1, 2025. Earlier in the Verkhovna Rada, this was associated with the introduction of "economic booking", but now this norm is necessary for monitoring compliance booked new requirements.
11. Raising the rent for the extraction of rubble, clay, granite and sand – not less than 5 dollars. per ton.

The law on raising taxes is critical for the government, as it depends on the state's ability to finance military spending even in 2024. In particular, revenues from new taxes were one of the sources of increase in defense spending by UAH 500 billion, for which the Verkhovna Rada voted on September 18.

The new tax rules were to be in place from October 1 and will bring in a budget of UAH 30 billion by the end of 2024 to finance the war. That is why government officials insisted on reducing the procedures for reviewing the request and signing it as soon as possible. They were not even stopped by the fact that the law passed on October 10 could introduce tax changes just in the middle of the month, which would confuse citizens and employers.

There is still a chance to add business hassles to the president if he signs the law in November. In this case, different parts of the salaries that citizens received within one month can be taxed at different rates.
If the employer paid the employee an advance on November 1, and the remaining salary will be paid on the 30th, then from the first amount he will pay tax at a rate of 19.5% (18% PIT and 1.5% military fee), and from the second – 23% (18% PIT and 5% military fee).
"There will be no retrospective transfer of taxes. All income received after the signing of the law will be taxed at a new rate, – explained the chairman of the tax committee of the Verkhovna Rada Danilo Getmantsev.

Why the law was not signed for a long time
On the eve of the adoption of the request in the second reading, the General Legal Department of the Verkhovna Rada indicated that some rules of the document do not comply with the Constitution. 

In particular – introduction of taxes "retrospectively" (primarily for banks and FOPs).

Ironically, delaying the president's signing of the document also violates the law. Article 94 Constitution points out that the president has 15 days to sign the act or veto it and return to parliament for revision.
"If the President of Ukraine has not returned the law for reconsideration within the prescribed period, the law is considered approved by the President of Ukraine and must be signed and officially promulgated, – goes to the Constitution.

During the preparation of tax changes, the president dissociated himself from them in every way. He did not mention this decision in his appeals or in communication with the media. Well, more, he advocated opposing things. 

Instead of taking more money from Ukrainians in the form of taxes, he offered to give everyone 1 thousand UAH.

At the same time, Zelensky knew both about the need to accumulate internal resources to finance the army, and about the method of collecting these funds by government officials. In the end, it was the president who approved the increase in the military levy and the final tax changes. 

Nevertheless, he is in no hurry to sign the approved.
"The president postponed the signing until the last. At meetings with Minfin and deputies, he repeatedly asked whether to raise these taxes, because there are funds from frozen Russian assets, "– told EP one of the participants in such a meeting.

EP interlocutors in the economic bloc of the government and parliament name several reasons for the delay. 

• Among them – dissatisfaction with the way the government communicated tax increases. 
• According to the president, Ukrainians had to clearly understand that the government was taking such a step, because it was experiencing a lack of resources to finance hostilities.

This view is also confirmed by the fact that it was the Zelensky insisted that the military levy be increased, not VAT, which was insisted on by businessmen and the public. After all, the military fee “is branded ” under the war, while VAT with it is more difficult to associate.

Despite this demand, the government and deputies who worked on the final version of tax changes, put in the object a number of other proposals. For example, – higher taxes for gas stations and higher rents for resource extraction, which annoyed Zelensky.
EP interlocutors reported that German government officials had complained to the OP about raising the rent for kaolin – special clay used in the ceramics industry. One of the German companies mines it in Ukraine.

Read also: "I am a professional in making unpopular decisions in this country": Gethmantsev on tax increases and detinization

"The president saw the addition of this rule as a violation of agreements with the government and parliament," – adds an EP interlocutor to the Cabinet.

Finally, the delay in signing the law, the interlocutors of the EP explain the reluctance to make unpopular decisions. 

"People often steal when you have to do what they don't want to do. The president is also a man, – adds a source.

The EP asked the President's Office why Zelensky had not signed the law and whether he planned to sign it. At the time of publication, there was no answer.

Can the president not sign the law???

During the consideration of changes in revenues from them to the 2024 budget were reduced. 

• Minfin's first offer provided for an additional UAH 141 billion, then the amount fell to UAH 57 billion, and the final version was to bring only UAH 30 billion. 

However, even their state would collect only if the law came into force on October 1.
Procrastinating the signing of the law on raising taxes already costs the budget about UAH 20 billion in non-received income, because the updated taxes will be able to be valid only for one month of the year if the president signs the law.

Minfin could replace non-tax increases with domestic borrowing. 

• Every week, Minfin sells domestic government loan bonds for UAH 20-25 billion. 
• However, the potential of the domestic debt market is not limitless. 
• In September, Finance Minister Sergei Marchenko admitted that the government is close to marginal opportunities to raise money in the domestic market.

It is likely that the plan to sell the OVDP in 2024 will not succeed in Minfin, according to the interlocutors of the EP in the economic bloc. 

• Together with the underfunded funds from tax increases, this means only one thing: lower defense spending. 
• After all, it is on defense that all the funds collected inside the country in the form of taxes and domestic borrowing are spent.

“Probably, we will not finance any defense expenditures by the end of the year, such as some defense orders. 

Relevant contracts will be paid only in 2025 ”, 

– says the interlocutor of the EP, familiar with the state of budget execution.

Much more problems of non-signing the law may bring to Ukraine in 2025. Then additional proceeds from the entry into force of the document should provide UAH 141 billion. These revenues are already pledged in the approved budget-2025.

Read also: Zelenskyy's war, debts and populism. What will the 2025 budget spend on?

The expected additional income would be enough to finance the war for a month, so it will not be possible to ignore this amount or replace it with internal borrowings.
Moreover, the introduction of tax changes is necessary not only to finance the war, but also to obtain funds from international partners, which are spent on civilian expenditures. The signing of the law is one of the requirements of the IMF on the eve of the vote of its board of directors to allocate another tranche of $ 1.1 billion.

The signing of Zelensky's tax law will not save even $ 50 billion, which the G7 countries have agreed to allocate as collateral for income from frozen Russian assets. 

• According to EP interlocutors in the government, familiar with the structure of this funding, Ukraine will be able to use less than half of this amount for military purposes. 
• In order to receive these funds, the authorities will have to comply with the demands of creditors, in particular the IMF, which insists on a balanced budget.

And in the conditions of long war and high geopolitical uncertainty the government wants to stretch the spending of these Russian funds at least until the end of 2026.