What’s wrong with the “new” ideas to reform the simplified tax system?
Column by CASE Ukraine senior economist Volodymyr Dubrovsky for Interfax-Ukraine
Key theses:
The reform of the simplified tax system (STS), proposed by the National Revenue Strategy (NRS) and supported by Danylo Hetmantsev, is presented as a fight against abuses and “not about raising taxes.” But the analysis shows: in fact, it is about a sharp narrowing of the scope of application of the simplified tax system and the displacement of microbusiness.
The NRS proposes:
– to cancel groups 1 and 2 of the STS, where the majority of microentrepreneurs work;
– to establish a differentiated rate for group 3 – from 3% for trade to 17% for intellectual services; – to oblige all entrepreneurs to maintain full commodity accounting at the primary level;
– to introduce mandatory registration as a VAT payer for turnover of UAH 1 million per year; – not to increase the limits to the Polish level of 2 million euros (≈100 million UAH), but on the contrary – to actually reduce them, in particular by refusing indexation.
At the same time, the NSD does not contain any real mechanism for combating key abuses: fragmentation of business, work above the limit and the “FOP instead of hiring” scheme. Instead of solving specific problems, the state is trying to “remove economic incentives” for everyone at once – that is, to make microbusiness uncompetitive and push it out of the market.
The most vulnerable industry is retail trade.
In 2024, out of 607 thousand FOPs in trade, only 80 thousand (13%) worked in group 3. This is because the Single Tax replaces taxes at the level of 3.4% of turnover, while the burden on legal entities in trade was only 1.6%. Now the NSD proposes to establish a tax almost twice as high as that paid by large companies. But the main blow is not the rate, but accounting. For microbusinesses, it creates quasi-fixed costs that large companies almost do not notice.
Most sole proprietors are not able to keep full accounting on their own, and the services of an accountant who also “resolves issues” cost from $ 1,000 per month — several times more than the income of a typical entrepreneur with a turnover of 1 million UAH. 1 million UAH of turnover is just income at the level of the average salary. After paying rent, electricity, equipment, the entrepreneur is actually working “for survival”. And full administration of VAT is a time expenditure 2–3 times greater than for non-payers (data from Info Sapience / CASE Ukraine). For such a business, it is simply unbearable.
As a result, microbusinesses are left with three “paths”:
– be part of the shredding scheme and avoid risks;
– exceed turnover, but “negotiate” with the tax office, as happened massively from 2016 to 2022;
– or go into complete obscurity, where sellers of counterfeit goods and “excise duty” have been working for a long time.
The paradox is that the main beneficiary of the reform is large retail business, which has been lobbying for the destruction of the simplified tax system for many years. Less competition = greater market power = higher monopoly profits from buyers and suppliers. This is also “profitable” for the state, because they are willing to pay taxes. But society as a whole loses: less competition = deadweight loss, that is, a decline in social welfare. The OECD argument that the SSO hinders business growth is equally false: without the simplified tax system, these enterprises simply would not have emerged due to extremely high barriers to entry.
Regarding “pseudo-individual entrepreneurs”:
Raising the rate for intellectual services almost to the level of the personal income tax also does not destroy the scheme – because employers still save on the SSC. Instead, it deprives Ukrainian specialists of the incentive to work in Ukraine, because by paying the same taxes in Poland they receive a completely different quality of the state.
The conclusion is simple:
the reform of the NSD does not fight abuses – it destroys microbusiness, reduces competition, increases corruption risks and harms economic growth, is beneficial only to large retail and part of the tax. The simplified tax system is not a problem, but an infrastructure for access to entrepreneurship. Its dismantling will have devastating consequences for the economy.
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