Shadow Economy Is Decreasing, Says Ukraine’s Lawmaker

Ukraine will adopt a bill to significantly increase taxes for the first time after the start of the full-scale invasion, though businesses were still not satisfied with the initiative and blamed the authorities for not doing enough to battle corruption and the shadow economy.

Ukraine’s partners, international financial institutions, the European Union, and the United States, also demand both.

According to Danylo Hetmantsev, a lawmaker from Zelensky’s Servant of the People party, Ukraine has had some success in the field. Hetmantsev is the key political influencer in the niche of taxes in the Verkhovna Rada, leading the parliament committee that drafts, reviews, and adds amendments to all tax bills in the country. 

He is also often an object of memes due to his quotes about decreasing the shadow economy in business. “What is proper taxation? This is the art of plucking a goose so that it does not scream,” he said in an interview with Babel in 2022, a saying that was quoted in chats and informally.

Ukraine now needs proper higher taxation after the military spending reached almost 40% of GDP from 5% in 2016. Russia’s invasion of Ukraine changed the landscape – Ukraine needs more revenue from all sources. 

But according to Hetmantsev, the state is already working on it. In his latest interview for Ukraine’s media outlet Ekonomichna Pravda, he talks about overall tax revenues being higher by almost 15% over the last year and an extra Hr.100 billion ($2.4 billion) for the state budget.

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Lawmakers voted to increase the military levy on salaries, and incomes of sole proprietors and freelancers. In addition, there is an advance payment for gas stations, a rate increase for non-bank financial institutions from 2025, and increasing rent for crushed stone.

A 50% income tax will also be imposed on banks. The industry earns more than in peacetime, Hetmantsev said, earning on deposit certificates rather than innovations or loans for business. 

This should bring Ukraine Hr.21 billion ($512.2 million) of tax income in 2024, and Hr.140 billion ($3.11 million) in 2025.

The bill was voted on in the middle of October 2024 and came into power at the beginning of October this year, which violates the Constitution. But there was a desperate need to find funds for the Armed Forces and time was running out. Therefore, Hetmantsev does not think there will be lawsuits and battles to cancel the decision.

The United States also financed its needs through taxes during World War II, utilizing government bonds as another source.

“If in 1940 there were 4 million income taxpayers in the US, in 1945 there were more than 40 million,” said Hetmantsev.

“The non-taxable minimum was halved, and income tax rates were increased: the minimum rate – from 6% to 13%, the maximum rate – over 90% in the marginal tax rate. A victory tax was also introduced, an analog of Ukraine’s military levy – 5% of all.

“In addition, the tax on corporations increased from 24% to 40%, and a special tax on military profits was introduced for corporations. There, too, the scale reached 90%,” Hetmantsev explained.

Why the Parliamentary Debates Left Ukraine with Less Tax Income

Lawmakers discussed an alternative to increasing the military levy, paid by businesses with transparent compliance – increasing the VAT tax. But though it could bring more revenue, it will also boost inflation.

“They would bring roughly comparable revenues: an increase in the military levy by 1 percentage point would give about Hr.30 billion ($756.1 million), and VAT could bring Hr.45-46 billion ($1.10-1.12 billion),” Hetmanstev said.

However, if expenditures increase significantly between the first and second reviews of the state budget for 2025, then lawmakers would need to return to the question of increasing VAT in agreement with the International Monetary Fund.

Tax Discipline Increased

Tax efficiency increased by 14.2%, according to Hetmantsev. “As for alcohol enterprises, the tax efficiency in 2021 was 5.1%, and now it is 7%. That is Hr.1.2 billion ($29.27 million) for eight months of the year. The sale of legal alcoholic beverages increased by 28%, he said.

Taxes from fuel increased 45% compared to 2023, or an extra Hr.5.1 billion ($36.59 million). Tax revenue from gambling in 2021 was estimated as Hr.204 million ($7.29 million), then increased in 2022 to 730.9 million ($19.97 million), during the eight months of 2023 to Hr.5.6 billion ($147.37 million), and during the eight months of 2024 reached Hr.11.7 billion ($285.37 million).

State revenues from selling electronics added another 34% since the beginning of the year and 157.7% of VAT growth year after year.

How Large is Ukraine’s Shadow Economy?

According to Hetmantsev, around half of the economy stays in shadow, commerce in Ukraine has an even higher share of 60-70%. The shadow economy cannot disappear overnight, partly due to part of the law enforcement that earns from corruption.

In cash the money is almost equal to the recent needs for defense – Hr.420-450 billion ($10.24-10.98 billion). “Therefore, the receipt of 100 billion hryvnias from the shadow economy decreasing is an unprecedented figure,” he said.