VAT for individual entrepreneurs – fighting schemes or expanding corruption opportunities?
An article by Oleg Getman, associate expert at CASE Ukraine and coordinator of the Economic Expert Platform for “Economic Truth”, in which he analyzed the draft law of the Ministry of Finance, which provides for a threshold limit for the transition to VAT of UAH 1 million for all individual entrepreneurs.
Key theses:
- The regulatory impact analysis for the draft law states that the benefit from its implementation will be UAH 39.9 billion. But both revenues and expenses are calculated on extremely dubious assumptions.
- The administrative costs of entrepreneurs are calculated by the Ministry of Finance on the assumption of unknown origin that the business entity spends an additional 56 man-hours per year on VAT administration. This assumption does not correspond to the real situation.
- A study of the state of tax administration in Ukraine conducted by CASE Ukraine based on a representative survey shows that the difference in labor costs for tax administration between single tax payers without VAT (but with employees) and with VAT is 140.2 man-days per year, 20 times more than calculated by the Ministry of Finance.
- The survey shows that corruption is a bigger problem for VAT-paying entrepreneurs than for non-payers. Thus, VAT payers on the general system claim that corrupt practices “were a very strong obstacle” in 11% of cases, while non-payers answer this question in the affirmative half as often.
Additional costs per entrepreneur (based on the average salary of the required accountant) are UAH 93,000. For the 660,000 entrepreneurs to whom the Ministry of Finance estimates that the new regulation will apply, counterproductive costs will amount to UAH 61.4 billion per year (World Bank labor cost estimates, excluding full accounting) or UAH 115.7 billion (CASE Ukraine labor cost estimate).
Microbusinesses will overwhelmingly not switch to VAT and bear the calculated costs, because this will make entrepreneurs uncompetitive. Instead, the new regulation will increase the fragmentation of individual entrepreneurs, will encourage the concealment of turnover and other schemes.
None of the goals declared by the Ministry of Finance will be achieved.
The Ministry of Finance’s estimated budget revenue figure of UAH 40.1 billion per year also looks dubious. According to recent estimates by think tanks, budget losses from all schemes of abuse of the simplified taxation system (STS) fluctuate in the range of UAH 26-32 billion per year.
What should be done to achieve the goals of the Ministry of Finance:
– IT consolidation of information resources of subjects of the state finance management system, in particular the State Tax Service, at the level of the Ministry of Finance and ensuring the administration of these information resources by an independent administrator.
– Ensuring integration with European VAT systems, VAT refunds, monitoring the movement of excise goods, payment information systems, etc.
– Ensuring the introduction of the exchange of advance customs information with other countries in order to accelerate the movement of goods and vehicles across the customs border, identify risky transactions and strengthen measures to combat smuggling and violations of customs rules.
– Improving the exchange of tax information with relevant authorities of other countries in order to prevent cross-border tax evasion schemes.
And most importantly, to achieve the stated goals of the Ministry of Finance, reduce the level of shadow economy, and minimize all the tax evasion schemes described above, it is necessary to create basic conditions in the country: continuation and completion of judicial reform – ensuring the rule of law, institutional reform of the State Medical Service and State Tax Service, and the National Police.
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