The regulator warned that lowering the VAT threshold risks increasing administrative pressure on small businesses without addressing core tax evasion channels. By citing CASE Ukraine’s findings, the DRSU reinforced the think tank’s long-standing position that reform should focus on combating large-scale shadow schemes and improving tax administration
Key arguments of the DRSU: costs for businesses and consumers, risks outweigh the benefits
In its decision, the DRSU emphasized that the developer had not proven the feasibility of the chosen regulation and had not provided adequate calculations in the Regulatory Impact Analysis (RIA). In particular, the DRSU points out that:
The end consumer will bear the actual costs: the service emphasized that the price increase will mean additional costs for citizens, “in the amount of the state’s fiscal benefit,” and sales may decrease.
The associated administrative costs of microbusinesses, other than the actual payment of VAT, have not been taken into account: reporting, tax invoices, accounting, and inventory accounting.
The risks (economic, institutional, and social) exceed the expected fiscal benefits, and therefore, it is impossible to conclude that this method of regulation is “optimal”;
No M-Test (mandatory assessment of the impact on microbusinesses) has been conducted, which, according to the DRS, prevents an accurate assessment of the burden and the need for compensatory mechanisms.
Separately, the DRSU noted a gap between the expected fiscal effect and actual costs: the Ministry of Finance estimated approximately UAH 40 billion in annual revenue, while the DRSU’s decision cites independent estimates of significantly higher administrative costs for businesses.
What the DRSU referred to: data from a study by CASE Ukraine
An essential element of the decision is the DRS’s reference to independent studies, in particular by CASE Ukraine and the World Bank, which show that the actual costs of VAT administration are significantly underestimated in government calculations. The document states that the transition from a simplified system without VAT to a VAT regime may require 74 to 140 person-days of additional work per year. The costs for a single entrepreneur may reach about UAH 93,000 per year (for example, for accounting services). On the scale of a potential 660,000 new VAT payers, this is estimated at UAH 61-115 billion in additional business costs per year, exceeding expected budget revenues — that is, “society will suffer net losses.”
Key findings of the CASE Ukraine study: why the “general system + VAT” is the most expensive for entrepreneurs
The CASE Ukraine study “The State of Tax Administration in Ukraine (2024),” based on a 2024 survey (focusing on a comparison of the general system and simplified regimes), demonstrates a systemic problem: tax administration under the general system is significantly more burdensome, and the heaviest burden falls on VAT payers.
Key findings that reinforce the position of the DRS:
The highest time costs are under the general VAT system. On average, 478.2 person-days per year are required for tax and accounting records. For comparison, under the simplified system without VAT, 114.5 person-days are needed (this figure does not include self-employed “simplified taxpayers”).
Individual entrepreneurs are “safer” in terms of sanctions pressure. 16.0% of individual entrepreneurs surveyed reported sanctions (penalties/fines/additional charges, etc.), about half as many as those working through legal entities (34.1%).
Pressure to pay VAT is stronger for VAT payers. VAT payers under the general system are more likely to report that corruption was a “powerful obstacle” (11.0% in the study). In contrast, non-payers are approximately twice as likely to report it.
Assessments of the integrity of tax and customs officials are polarized. 47.1% of respondents believe that officials act in good faith or mostly so. In comparison, 41.8% believe that their powers are used dishonestly or systematically abused.
Businesses are more likely to see schemes facilitated than counteracted. The share of respondents who believe that the State Tax Service tends to facilitate evasion schemes (27.5%) exceeds the share who believe the service effectively prevents it (22%).
What’s next
The DRS’s refusal to approve the draft law is not a “final verdict” on the idea of change. However, it does mean that the draft, in its current form, has not passed a key regulatory procedure due to a lack of justification, calculations, and an assessment of the impact on microbusinesses and consumers.