Setting a transfer of the large and medium agricultural producers  to a common system of VAT taxation beginning from  January 1, 2015, and prolongation of VAT’s  tax exempt regime for transactions with export of grain and industrial crops up to January 1, 2015, are proposed by the government bill No. 4309  registered in the Parliament of Ukraine on 21.07.2014.

The indicated bill makes provision for abolition of preferential regimes in agro-industrial complex (accumulation of VAT at the accounts of agricultural producers and fixed agricultural tax) for enterprises occupied with land cultivation over 1000 ha in size and gross income of which exceeds 20 million UAH a year. These proposals concern the vast majority of economic agents in agro-industrial complex since, according to experts of UCAB, the average area of land which owned or used by agricultural enterprises exceeds 2000 ha.

Experts note that adoption of the bill is expected to have a limited effect on the budget (additional revenues from VAT is to be used for reimbursement of VAT in cases when grain and industrial crops being exported) and to result in significant complications regarding the administration and artificial cutting down of farms.

According to Vladimir Lapa, General Director of Ukrainian Agribusiness Club (UCAB), the medium-sized farms and livestock sector will be hardest affected by these innovations. “In many cases, middle farms are not exporters of agricultural products, so, consequently,  they will be not able to claim a refund of export VAT.  The livestock will leave without any compensation at all and it may result particularly in a massive cut of cows”.

Thus, in terms of another significant price reduction on milk many manufacturers are already working on the verge of profitability. So, the transfer of these agricultural farms to the common system of VAT taxation is inevitably to lead to reduction in the number of livestock and cutting down of milk production in the country.

Experts of UCAB point out that the budget effect from the proposed innovation is doubtful. Theoretically, in prices of 2013 year, the accumulated amount of VAT is 16 billion UAH, while 10 billion UAH is the budget savings from the export VAT that was not refund. So, the positive effect from the common system of taxation makes up 6 billion UAH. However, according to Lapa, the budget is unlikely to receive these funds - "Some farms will remain on the preferential tax system and accumulation for them will be saved. Furthermore, we may predict that in a few years the number of the farms cultivating less than 1000 ha will substantially increase that reflects in significant shortening of tax assessment base”. Similarly, owing to the low profit in production of most kinds of agricultural products it should not count on the considerable amount of revenues from the income tax. Finally, the state does not take into account the growth prospects of its own costs for tax system administration in agro-industrial complex, not to mention the costs of business.

UCAB hopes that the state takes into account the position of farmers and a compromise solution will be found for increasing its revenue that will not be so negative for this sector.