The Government proposed to the Parliament sources of additional revenues to finance defence and security expenditures

Today, on 18 July, the Government adopted two Draft Laws. The first one proposes to the Parliament to amend the Tax Code allowing to finance additional defence and security expenditures. The second one proposes amendments to the State Budget to increase defence and security expenditures needed to continue to effectively resist the aggressor. 

The full-scale war has now entered its third year, and the needs in the defence and security sector are growing. An additional UAH 500.3 billion is needed to meet critical expenditures. 

We can rely only on our own resources for financing our resistance to the aggressor, the main ones being taxes and domestic borrowing. This will help to ensure our security and bring victory closer!

The most flexible option to finance additional defence needs among all possible is proposed, which consists of two parts:

1) Almost three quarters of the additional defence financing needs are proposed to be covered by domestic borrowing, over-performance of the current State Budget revenues, including through de-shadowing and savings in certain expenditures (UAH 361.6 billion)

2) And only one quarter - by revising the military tax, excise duties and some other measures (UAH 138.7 billion). Many of the items in this list relate only to those who consume expensive imported goods that are not essential in wartime.

What specific revenues are proposed to cover three quarters of the additional need (UAH 361.6 billion)?

A significant part of this is additional proceeds from domestic government bonds worth UAH 220.1 billion. Financing the war through domestic borrowing is a global practice that has been proven effective. It allows to raise the necessary resources for ensuring national security, while supporting economic development and contributing to the strengthening of the domestic market.

Savings on public debt repayment and the performance by the state of its guarantee obligations for borrowers who received loans under state guarantees for the first 6 months of the year are driven by the deviation of the actual exchange rate of the national currency against the foreign currency on the date of payment from the forecast exchange rate, the actual consumer price index and the discount rate of the National Bank of Ukraine compared to the consumer price index and the discount rate used in the draft budget, the receipt of a subsidy from the European Commission for servicing loans received under macro-financial assistance and independent performance by business entities of debt obligations on loans received under the state guarantee, which makes it possible to allocate an additional UAH 65.7 billion for military needs.

The actual overperformance of the State Budget revenues in the first half of 2024 is expected to raise UAH 75.8 billion, of which:

• Corporate income tax + UAH 40 billion,

• Value Added Tax (import) + UAH 5.5 billion

• Funds transferred by the NBU + UAH 20.9 billion

• Administrative fines for traffic safety and other revenues + UAH 9.4 billion 

What specific revenues are proposed to cover one quarter of the additional need (UAH 138.7 billion)?

The first stage of the gradual bringing excise duties to the minimum EU standards will provide an additional UAH 16.9 billion, including the revision of excise duties on tobacco (UAH 3.8 billion) and fuel (UAH 9.8 billion) starting from 1 September 2024. As well as the introduction of an excise tax on sugar drinks (+UAH 3.3 billion), which has been introduced in the vast majority of countries.

The review of the military tax and some other measures will allow to mobilise resources for the security and defence sector by +UAH 121.8 billion, of which:

• Increasing the rate of military tax for individuals from 1.5% to 5.0%. 

• Introduction of a military tax for legal entities under the general and simplified taxation system of 1% of income.

• Introduction of a military tax for individual businesses of groups 1, 2 and 4 in the amount of 5% of two minimum wages and group 3 - 1% of income.

• Introduction of a military tax on certain transactions: A military tax of 5% of the value of banking metals when purchased from banks is introduced. A military tax of 5% of the income from the sale of one real estate object is also envisaged. Mobile operators are required to pay a military tax of 5% of the mobile services. When registering vehicles for the first time, a military tax of 15% of the value of the car is charged (except in cases of providing cars to persons with disabilities in accordance with the law). In addition, businesses, institutions, organisations and individual entrepreneurs selling jewellery are subject to a military tax of 30% of the sold jewellery.

• Establishment of the obligation to make monthly advance payments of corporate income tax by taxpayers engaged in retail trade in fuel 

• Imposing import VAT on goods with a value not exceeding EUR 150. At the same time, imported goods with a total value not exceeding EUR 45 for one individual beneficiary will not be taxed.

What areas will the funds be used for?

The Draft Law provides for an increase in expenditures for the defence and security sector by UAH 495.3 billion. In particular, these funds will be distributed as follows:

• Ministry of Defence will receive UAH 333.0 billion.

• Ministry of Internal Affairs - UAH 108.1 billion, of which:

• National Police - UAH 15.2 billion;

• State Border Guard Service - UAH 41.9 billion;

• National Guard - UAH 48.2 billion;

• State Emergency Service - UAH 2.8 billion.

•  State Special Transport Service will receive UAH 40.7 billion.

• Defence Intelligence of the Ministry of Defence of Ukraine UAH 7.5 billion.

• Security Service of Ukraine - UAH 5.1 billion.

• Foreign Intelligence Service - UAH 0.5 billion.

• State Service of Special Communications and Information Protection - UAH 0.3 billion.

• Department of the State Protection - UAH 0.1 billion.

It also provides for an additional UAH 4.5 billion for the reserve fund for emergency and urgent expenditures.

Expenditures of the Ministry of Reintegration of the Temporarily Occupied Territories have been increased by UAH 0.4 billion for payments to war prisoners. The Ministry of Justice will receive an additional UAH 0.1 billion to support the operation of penitentiary institutions.

Thus, the total State Budget expenditures are to be increased by UAH 500.3 billion.

Notably, in order to receive the above additional resources, the Parliament must adopt the relevant amendments to the tax legislation and have them signed by the President of Ukraine.