The outburst of real economy

“Take away the government’s noodles!” shouted representatives of small and medium businesses near the Verkhovna Rada building on September 23 [in reference to a Ukrainian idiom, hang noodles on someone’s ears, i.e., pull wool over someone’s eyes. — Ed.] They demanded that MPs vote against the draft Tax Code and pass a vote of no confidence on Prime Minister Mykola Azarov and Head of the State Committee for Regulatory Policy and Entrepreneurship Mykhailo Brodsky.

The enraged businessmen brought bowls with boiled noodles to say that they are sick and tired of what the government feeds them every day, and so they suggest that the bureaucrats taste their own menu.

“What Kolesnikov says on TV about entrepreneurs not paying taxes or contributions to the pension fund is a lie,” indignantly says Liudmyla, a private entrepreneur from Chernihiv. “People employed at an enterprise receive the same income of 1,000 hryvnias but pay 20 hryvnias to the Pension Fund, while we have to give 300-400 hryvnias. Why? We are barely making ends meet: we are out there both in cold and heat. Do they think that we are rich people? Far from it. We are barely staying afloat and can hardly feed our families. If they introduce this Tax Code, which will put more pressure on us, we will simply die.”

However, Oksana Prodan, head of the Committee to Protect Entrepreneurship attached to the opposition government, says that small and medium business will not really disappear even if the Tax Code is passed in its current form. Business will simply go into the shadow economy. “Entrepreneurs are the kind of people who will not go to employment centers. They need to feed their families. Therefore, they will work, survive, and hide in the shadows, bribing the police and the tax officers,” forecasts Prodan.

“But why do we have to grease someone’s palm?” says an enraged Volodymyr Kimanovsky, an entrepreneur from Uman. He has been in business since 1996. “I am trying to operate legally. I am standing here in order to prevent the government from doing the same thing they did to the village,” he said explaining his position to The Day.

Entrepreneurs calculated that the government-sponsored tax initiative will take away 0.85 hryvnias from each hryvnia they earn. “We will pay, but we want the government to show an example. We want to hear someone who would say why, in the past 20 years, nothing has been built or developed. Why did private entrepreneurs managed to build, for example, stores and put adjacent territories in order, while the state failed to raise and develop industry?” says Lidia Kravchuk, leader of Uman’s Entrepreneurs Leagure, in justification of the protesters’ stance.

This protest rally is just a warning, they say. “If MPs vote for the government-sponsored draft Tax Code, we will raise all of Ukraine to its feet,” says Olena Herasymchuk, head of Yednannia, the Mykolaiv Oblast Trade Union of Small and Medium Business Employees. “What they are saying there is one thing. Ukraine’s real economy is in the bazaars. The bazaar and small and medium business determine prices,” adds Volodymyr from Uman.

Interestingly, over 500 entrepreneurs from all over Ukraine came to the Verkhovna Rada at their own expense. They are wasting their working days but hope that MPs will hear those who, the protesters emphasize, feed them by paying taxes.

Will parliamentarians lend an ear to the protesters’ demands? On Wednesday the Verkhovna Rada of Ukraine refused to introduce a tax break for small business.

A mere 143 MPs out of the 400 that were registered in the session supported a bill sponsored by BYuT MPs Natalia Korolevska and Yevhen Suslov.

This bill envisaged a temporary tax break for individual entrepreneurs who do business without hired labor until December 31, 2016.

However, government officials come up with specific arguments against opposition-proposed bills. In particular, specialists from the State Committee for Regulatory Policy and Entrepreneurship went public with the first results of a comparative analysis of two draft Tax Codes registered in the Verkhovna Rada. One was submitted by MPs Mykola Katerynchuk and Serhii Teriokhin, and the other one by the Cabinet of Ministers.

The Committee’s analysis shows that the first draft Tax Code has eight local taxes and duties, while the second one has four. The former bill has provisions for a reduction of the income tax down to 20 percent by January 1, 2014, while the latter, down to 16 percent starting from January 1, 2016.

However, probably aware of a failure to grasp all the arguments in favor of the government’s tax reform, Prime Minister Mykola Azarov instructed members of the government to launch the process of supporting the draft Tax Code in the Verkhovna Rada. “Your job of transferring the code to the Verkhovna Rada is not over yet. Therefore, I set the task before members of the government to launch the process of supporting and explaining the draft Tax Code in parliament,” emphasized Azarov as he opened a Cabinet of Ministers meeting. The prime minister noted that they needed to do the necessary work with the committees, factions, and MPs and convey to them the advantages of the tax reform. “Five hundred pages of approved norms of tax legislation instead of 4,000 pages of separate and contradictory normative acts,” he said summarizing the government’s draft Tax Code.

According to Azarov, the present tax legislation was drafted for an economic transition and has many loopholes that can be used for avoiding tax payments, and complicated norms which opened space for misuse and corruption by both taxation bodies and taxpayers. As a result half of the economy is now in the shadows.

“We understand that there are many people who want the country to continue functioning according to ‘rules with no rules.’ However, it is obvious that this maintains underdevelopment and leads to the state’s degradation. Instead, we proposed normal rules that one we see in a developed country,” stressed the head of the government and added that one should not expect the country to flourish right after the new Tax Code is passed. It is very likely that there will be temporary losses in budget, which will be covered with accumulated resources. There will also be difficult everyday work to restore the economy and to form new civic traditions.

Azarov argues that by elaborating the new Tax Code the government made three great steps: liberalization of tax legislation; stimulation of investment and innovation development; and equal conditions for all market players, as well as equal conditions for taxpayers and the state.

Serhii Tihipko, vice prime-minister and head of the Strong Ukraine party, refutes the concerns of the protesters. He noted in his speech during parliamentary hearings on “Economic Reforms: Reality and Expectations of Ukrainian Business” that the revised draft of the Tax Code, which was provided for the parliament’s consideration, envisages considerable improvement of the entrepreneurial climate in Ukraine. “Today we have to lay the basis of the country’s modernization, which was long awaited by business [...] We are absolutely open for business to accept remarks and react to them clearly,” said Tihipko.

The vice prime-minister reminded people that today Ukraine is almost last in the world rankings of ease of doing business. The new code was made to change the situation in a fundamental way. Tihipko once again named the main elements of the new code that are aimed at economic liberalization: gradually reducing the tax on profits from 19 to 16 percent, a ten-years zero rate for shipbuilding and aircraft construction companies, hotels, private hospitals and schools, and also automatic VAT compensation on the 23rd day after submitting the declaration.

Tihipko also noted that the government drafted a series of laws that will considerably limit the possibilities for state officials to put pressure on business. “The original documents will be forbidden for confiscation outside criminal investigations. The possibility of stopping the financial activity of an enterprise will be removed, except for court decisions authorizing such actions. Tax services will be forbidden to reject tax declarations without justification, and officials that will violate this ban will be punished by administrative measures,” added the vice prime-minister.

However, those arguments of the state officials do not persuade the representatives of small and medium business who announced further protests near the parliament. Is the problem really in the code itself, as is believed by entrepreneurs, or in imperfect communication with the society and in opposition instigations, as the state officials think?

The Day asked press services of the Ukraine’s Cabinet of Ministers and the State Committee for Regulatory Policy and Entrepreneurship, as the protesters demand the dismissal of their heads, to comment on the situation. However, at the time of writing we received no answer.