Annually losing hundreds of billions due to a hidden economy in Ukraine: Insight into the clandestine financial operations of the nation.
Ukraine battles against a flourishing underground economy that drains the nation of hundreds of billions of hryvnias each year, impacting critical sectors such as the military, healthcare, and infrastructure. This predicament stems from the current structure of economic activity and necessitates immediate action.
As per official declarations, the scale of the underground economy has reached a tipping point, with over half of all economic operations occurring outside legal boundaries. This means that a significant chunk of business evades taxes, disregards labor laws, and creates an uneven playing field for legitimate entrepreneurship.
Financial Losses to the Budget
The head of the financial committee of the Verkhovna Rada estimates the volume of the underground economy to be between 800 and 900 billion hryvnias yearly. These revenues could bolster budget income, particularly during war times, when every hryvnia matters. These figures are based on an analysis considering current GDP growth and the dynamics of economic processes.
Comparing figures with EU countries highlights the urgency for drastic changes in Ukraine. In EU nations, the underground economy doesn't exceed 7%, while in certain Ukrainian sectors, it reaches 60%. Thus, combatting the "shadow" economy isn't merely an urgency, but a critical necessity at the state policy level.
Business Facing Unfair Conditions
When some entrepreneurs operate "legally" and others operate "under the radar", competition is corrupted. Those adhering to the law bear hefty costs and lose competitive advantages. Consequently, an unattractive environment for investments and honest business is created.
There are also hazards for participants in the underground sector. The absence of legal protection, instability, and the inability to formally hire employees make such activities risky. This instability is also reflected in consumers, as businesses hiding in the shadows often disregard quality and safety standards.
Establishing uniform rules for the market paves the way for international investments. A transparent economy is not just a signal to partners but also a promise of stability. The fewer informal schemes, the higher the standing of Ukraine's management system, both domestically and abroad.
Governmental Interventions
The tax service has intensified control over online sales and is closely monitoring tax avoidance schemes. Proposals to simplify accounting and reduce bureaucratic burdens for small to medium-sized businesses are also being discussed to encourage a shift into the legal realm.
Of note, the government does not plan on increasing taxes. This is particularly crucial during economic recovery from crises. The primary focus is on expanding the tax base through the legalization of existing incomes, rather than burdening honest taxpayers further.
Previously, we reported on the US's shift in Ukraine aid format.
Insights:
- Ukraine is working on digitalizing tax administration to increase revenue and reduce bureaucratic hurdles for businesses[4].
- By 2025, efforts to tackle the underground economy could generate around $4B additional revenue for the state budget, without increasing taxes[5].
- The Ukrainian government is contemplating legislative changes to discourage informal economic activities and foster legal entrepreneurship[3][5].
- Beyond simplifying administration, the government aims to provide support mechanisms for formal businesses, although specifics are yet to be disclosed[5].
- Ukraine may capitalize on international cooperation, such as with the EU, to enhance economic stability and attract investment[3].
The head of the financial committee of the Verkhovna Rada estimates that the underground economy is causing a significant financial loss to the budget, as the volume of the underground economy is between 800 and 900 billion hryvnias yearly, revenues that could bolster budget income, especially during war times. In contrast, the absence of legal protection, instability, and the inability to formally hire employees make activities in the underground sector risky for participants, creating an unattractive environment for investments and honest business. To tackle the underground economy, the Ukrainian government is considering legislative changes to discourage informal economic activities and foster legal entrepreneurship, while also aiming to provide support mechanisms for formal businesses.
