Rada reduces income tax to 13 percent flat rate (06/01/03)

Rada reduces income tax to 13 percent flat rate

by Roman Woronowycz
Kyiv Press Bureau

KYIV - Ukraine's Parliament finally approved a reduced income tax rate on May 22, establishing a 13 percent flat tax rate for Ukrainian workers.

While a broader, new tax code is still held up in committee as endless political maneuvering among the business elites that dominate the Verkhovna Rada continues, the new flat tax, which took several years to approve, should please employees. Some workers previously shared up to 40 percent of their income with the government, that is if they paid at all, because a large portion of the labor force has avoided taxes, aided by understanding employers.

"I believe all of society will welcome the law," explained President Leonid Kuchma upon hearing of parliamentary approval while at a meeting of Central and Eastern European leaders in Salzburg, Austria.

"People will no longer hide their wages through compensation under the table," added the Ukrainian president, according to Interfax-Ukraine.

In fact, the government is counting on just that. As First Vice Prime Minister Mykola Azarov explained after the bill's approval, the state coffers should receive additional revenues as more people decide that they should no longer risk avoiding the required income tax when it is now a relatively affordable sum - not worth the risk of fines and jail time. Mr. Azarov said he believes the additional revenue will easily offset the larger payments that were made by fewer people. Government estimates have put the rate of non-compliance with the earlier tax law at well over half the working population.

"In the future the main source of government revenues should not be from large factories but from individual workers," explained Mr. Azarov.

The new tax will go into effect on January 1, 2004, and remain in effect until 2007, after which it will rise to 15 percent. There were several other tax measures approved in the bill, among them a 5 percent tax on interest income on bank deposits.

For those at the bottom of the income scale, those who earlier were required to give up 10 percent of their income in taxes, the Rada's move is, in effect, a tax increase. However, the minimum wage in Ukraine is scheduled to rise to 237 hrv from its current 185 hrv on December 1 of this year, which should more than compensate for the additional money the state will be taking after the New Year.

In addition, eventually the government will not tax the first 237 hrv of any income. However the exemption will come into force in a graduating scale, with 30 percent of the exemption not taxable in 2004 and the full exemption not subject to taxation by 2007.

The decision by the Verkhovna Rada to implement a 13 percent flat tax on income follows a similar decision made last year in Russia, which many experts agree has helped to bring taxpayers out of the shadows and increase government revenues.

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