Ukraine to raise income tax levels to help war-battered budget

by Reuters
Wednesday, 6 August 2014 16:18 GMT

* Tax reform seen as key to efforts to tackle big budget gap

* Higher taxes needed to help meet costs of battling rebels

* PM says eyes social justice with new tax on higher earners

By Natalia Zinets

KIEV, Aug 6 (Reuters) - Ukraine's prime minister unveiled plans on Wednesday to raise income tax rates and to establish a new tax bracket for higher income earners to help bolster next year's budget and handle the financial strains from the war against pro-Russian separatists.

Arseny Yatseniuk, speaking confidently at a government meeting after winning a battle of wills with parliament over budget legislation a week ago, proposed a new three-tier income tax system, including a top 25 percent bracket for high-earners on incomes of more than $1,700 per month.

The proposed new system, which will include two lower bands of 15 percent and 20 percent, will replace the existing two-tier system of 15 percent and 17 percent.

The new measures, which will go to parliament in early September, were expected to bring an additional 3.5 billion hryvnia ($290 million) into the budget, Yatseniuk said.

The average national salary in Ukraine is around $300 per month, according to official state statistics. But Yatseniuk said real earnings were much higher than this and the scheme would encourage employers to declare real pay levels.

Tax reform is seen as a vital part of efforts to ensure that heavily-indebted Ukraine, embroiled in a protracted crisis in relations with neighbouring Russia and a separatist war in the east, can rein in its widening budget deficit and satisfy its biggest lender, the International Monetary Fund (IMF).

"As the head of the government, I believe that the 2015 budget must be passed and calculated on the basis of a new taxation system," Yatseniuk said.

Justifying the new high tax bracket, he said: "We propose acting according to the principle of social justice and changing the system of individual taxation so that he who earns more will pay more."

At the end of July, Yatseniuk won a significant victory over parliamentary deputies whom he had earlier berated for blocking reform and threatened with his resignation.

Parliament subsequently rejected his resignation and finally passed legislation he argued was needed to finance the army offensive against the separatist rebellion in eastern Ukraine and to avert a national default on its debts.

Yatseniuk had said the government would have defaulted on debt payments and missed out on the release of further funds under a $17-billion International Monetary Fund bailout if it had failed to pass the legislation.

Laws passed late last month introduced an additional 1.5-percent personal income tax until the end of the year to cover the costs of Ukraine's "anti-terrorist operation" against the separatists, who declared two 'people's republics' in the east.

The government also hiked taxes on tobacco and the mining, oil and gas sectors and earmarked nearly 2 billion hryvnias for rebuilding of infrastructure damaged by fighting in the east. (Writing by Richard Balmforth; Editing by Gareth Jones)

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