Ukraine grapples with tax hikes amidst war funding crisis

The country aims to allocate 500 billion hryvnias (11 billion euros) for the war effort, but to do so, it must increase debt and taxes. Ukrainian authorities have faced sharp reactions from both foreign and domestic businesses regarding the latest bill proposal.

The proposal was to impose a tax of ₴120 billion (€2.7 billion) on an already heavily affected population. "The war has been going on for the third year, and the government has been doing everything possible not to raise taxes for business. Today, all other sources for increasing the funding of the defence forces have already been exhausted," said Ukrainian Finance Minister Serhiy Marchenko.

Ukraine is preparing to continue the war with Russia in 2025 and is discussing the necessary financial support with Western partners for this purpose, added Marchenko.

The government faces a dilemma. Entrepreneurs have sharply criticised the tax bill, which was submitted to the Ukrainian parliament at the beginning of July, and are starting to close their pockets.

The Ukrainian Chamber of Commerce stated in a Monday statement that "the search for additional revenues through the introduction of new taxes will greatly burden business". "Against the background of Russian aggression, the destruction of infrastructure, the reduction of markets, and the outflow of personnel, additional fiscal pressure on Ukrainian business makes economic stability impossible," it added.

The pressure not to raise taxes has also come from outside Ukraine.

The United States is encouraging the Ukrainian government to increase revenues primarily by reforming customs and combating gray markets," said Penny Pritzker, the U.S. Special Representative for Ukraine's Economic Recovery, at a Monday briefing in Kyiv.

"There is also a huge source of profit in the gray markets of cigarettes, alcohol, or electronics that can be sold on a large market. And that's why we encouraged the Ukrainian government to focus on this," added Pritzker.

The American Chamber of Commerce has appealed to the Ukrainian government not to burden law-abiding businesses with additional taxes but instead take action to reduce the massive and untaxed grey market in Ukraine.

"AmCham Ukraine firmly believes that the source for additional tax revenues is in combatting evasion and ensuring equal rules for all, not increasing taxes on legitimate taxpayers who already bear the highest burden," stated the chamber.

Ukrainian authorities met with company representatives on Wednesday, but failed to reach an agreement, so the issue was postponed to next week.

"We agreed that this is the beginning of a dialogue," wrote Prime Minister Denys Shmyhal after the meeting.

Danylo Hetmantsev, chairman of the parliamentary tax committee, said the tax increase was "painful but necessary."

The Ukrainian government claims it must increase revenue by ₴500 billion (€11 billion), three-quarters of which will come from new loans, and the rest from higher taxes. Once collected, 60 per cent of the money will go to military salaries, and the remaining 40 per cent will be spent on weapons.

The tax bill proposes increasing the war tax paid by Ukrainian residents and raising customs duties and excise taxes on goods such as fuel and tobacco.

Ukraine has allocated about 37 percent of its GDP, or nearly €39 billion, for defence, most of which has been covered by taxes this year.

Last year strained public finances, as Kyiv was forced to use its own funds to purchase weapons due to months-long delays in the U.S. Congress passing the €58 billion military aid bill, which was finally approved in April.

Finance Minister Marchenko said a decision on the tax increase should be made by September.