After focusing on improving relations with Russia during his first four months in power, President Viktor Yanukovych is shifting focus to overhauling and simplifying the nation’s tax code.
The government, led by Prime Minister Mykola Azarov, on June 9 adopted draft legislation that, they insist, will boost economic growth, budget revenues and reduce the shadow economy by lightening the tax burden on most businesses. Richer citizens will face slightly higher taxes than those of average incomes. The changes are now being disseminated to the International Monetary Fund, the nation’s top Western lender, the business community and the Yanukovych-loyal parliament for their blessings.
“The government has a strong enough majority” in parliament to swiftly adopt the tax code, said Viktor Luhovyk, analyst at Dragon Capital investment bank. Today’s tax system is corrupt, bureaucratic and so onerous that many companies shield income and profits from government agents, depriving the nation of much-needed revenue. As of June 10, however, the details were still not public.
All that is known about the tax plan are snippets revealed by government officials. Azarov envisions cutting profit taxes on businesses from 25 percent to 20 percent, followed by a further reduction to a 17 percent rate starting 2014. The corrupt value added tax system – in which favored companies get government refunds while others don’t – will experience a rate cut to 17 percent, from the current 20 percent.
In a slightly progressive shift, citizens earning more than Hr 50,000 per month (about $6,200) will find their income taxes increased from the current 15 percent rate to 17 percent, according to Ukrainian officials.
Also, the plan will attempt to boost the nation’s once-booming but now frozen residential real estate construction industry by eliminating value added taxes on services. Still, it remained unclear what changes are in store for taxes that affect most citizens and businesses.
Officials suggested that the privileged and flat monthly tax rate charged to small entrepreneurs – of Hr 200 -- would remain in place. But they have not elaborated on whether the hefty payroll taxes which are paid by employers for official employees would change.
The need for change is indisputable. The current tax code, with all its onerous and bureaucratic elements, is considered a major drawback on investment and a major reason why up to 50 percent of the economy operates in the shadows. Ukraine is scraping the bottom of the World Bank’s ease of doing business ratings, finishing 181st out of 183 countries in taxation.
Yanukovych and his team have lately been talking up their reform credentials, and the tax push is seen as their first crack at solving some of the nation’s chronic problems. The president, to mark his 100 days in power last week, outlined a liberal and comprehensive 10-year economic plan.
The business community greeted Yanukovych’s arrival to power with cautious optimism that he will improve the investment climate. But now many business leaders are expecting action, not merely words . According to a survey conducted by the 700 member European Business Association ,"experts" and members of the Association noticed not significant progress in certain spheres, such as currency regulation and political stability, while the main legal and economic problems have either remained at previous levels or worsened." Anna Darevyanko, the EBA director said Yanukovych's administration has been receptive to the business community and has made the right declarations in many areas.She noted that Yanukovych has the political power to deliver reforms, and has sent the right signals, but should start "acting".