No other country practices such system of open acquisition of budget funds by private persons. Of course, it is very profitable for a narrow circle of entrepreneurs who act as importers and exporters simultaneously and who, due to this and tax exemptions, can feather the nests of certain Ukrainian nomenklatura clans.
The simplest and most effective way to ease the burden of the financial crisis on Ukraine would be to straighten out the tax system by canceling a great many unwarranted and unjustified tax exemptions.
As a result, the budget would receive considerable additional income. The next logical step would be to reinforce the customs frontiers and block smuggling routes, invalidating ungrounded VAT exemptions, including such exemptions with regard to imported goods. And by all means canceling the so-called zero import tax rates. The import tax must be levied on goods so as to keep the average rate at 15%, as is the case in Poland and as recommended by the IMF. Enterprises should be denied the privilege of writing off any unproductive expense as gross costs, thus overstating products’ par value and understating the income tax. State duties should be levied on VAT-exempt barter deals.
If carried out, these measures would make it economically possible to legislatively lower the corporate income tax from 30% to 20%, and that on wages from 50% to 35%, with regard to all business entities.
As for the value added tax, it does not exist in the US, meaning that the American economy has more room for maneuver on the open world market. It is more dynamic than in any of the EU countries where VAT is levied as a matter of course, mainly for political reasons.
Now if we are to follow the European road, we must abide by established tax accrual procedures. If we transgress them, the economy and budget will be exposed to considerable financial losses.
Below are approximated estimates of budget losses incurred by all those VAT exemptions.
1996 output data (courtesy of the Ministry of Finance and State Customs Committee): Hr 80.5 billion GDP; Hr 30.15 billion consolidated budget; 20% VAT base rate. In 1996, the budget received Hr 6.3 billion in terms of VAT payments, including Hr 5.4 billion paid by domestic commodity producers and Hr 0.9 billion by foreign producers.
VAT accrued throughout the year is entirely included in GDP. Without VAT exemptions (both obvious and hidden), its share in GDP would be 16.7% (Hr 15 billion). In 1996, domestic commodity producers actually paid Hr 5.4 billion worth of VAT, under 40%. Accordingly, the amount retained as a result of obvious and hidden exemptions was Hr 9.6 billion.
Add here import VAT exemptions: $18.2 billion (Hr 32.8 billion). The amount actually accrued when clearing through customs was Hr 0.9 billion. If all imports covered by the VAT were charged 20%, the amount received by the budget would be Hr 6.6 billion. In other words, VAT-exempt imports and other foreign trade transactions relieved the budget of Hr 5.7 billion in 1996. All told, 1996 budget losses resulting from VAT unpaid by domestic and foreign commodity producers amounted to about Hr 15.3 billion.
In 1997, the situation did not improve. Tax-exempt imports, joint venture and bank revenues, overstated gross costs, accumulated accounts payable and unsold stock at enterprises raised budget losses to Hr 17 billion.
In 1998, the budget income situation worsened considerably. The Cabinet initiated VAT exemptions with regard to most imports, later invalidated by the law of Ukraine On the Value Added Tax. In addition, a rule was enacted whereby the state now paid exporters a premium worth 20% of the cost of exported products. And so most imported goods were VAT-exempt and when exporting products each exporter was entitled to a premium paid from the budget. No other country practices such system of open acquisition of budget funds by private persons. Of course, it is very profitable for a narrow circle of entrepreneurs who act as importers and exporters simultaneously and who, due to this and tax exemptions, can feather the nests of certain Ukrainian nomenklatura clans.
It is interesting to note that, despite the performance of the Finance and Banking Committee of the previous Verkhovna Rada, most the members of which were guilty of causing Ukraine’s financial crisis, were elected to the new Parliament. This points to considerable support from grateful exporters and importers.
To correct the present situation, changes must be made in the VAT law, invalidating obvious and hidden exemptions, especially with regard to imports. The only alternative would be exempting all imports, while stopping their return (payment of export premiums) when exporting products from Ukraine, renewing the previous zero export VAT rate procedure, protecting the domestic market by an import tax.






