Business urges the authorities to take action instead of just talking about the shadow economy

07/ 04/ 2021

On Tuesday, April 6, there was a press conference The selectivity of control and punishment for violations of the law: negative consequences for the economy at which experts in risky areas of trade shared information on the shadow economy. Experts from major associations, including the European Business Association, spoke about the volume of illegal products circulating in Ukraine and how the shadow sector affects the economic performance of both the industry and Ukraine as a whole. View the video of the meeting It is no secret that the illegal market causes enormous financial damage to the countrys economy - primarily due to tax evasion which results in the shortfall of the state budget revenues. Moreover, transparent, and perfectly legal business is becoming less competitive and, consequently, being pushed out of the market by unscrupulous entrepreneurs. We should also note the reputational losses for Ukraine and the deterioration of investment attractiveness as companies will not be eager to enter the domestic market where fair competition is a losing cause. In confirmation of this fact, the President of Ukraine raised the problem of illegal imports in Ukraine at a meeting of the National Security and Defense Council on April 2. He referred to smuggling as an economic terrorism against Ukraine which costs 300 billion UAH annually to the state budget according to expert estimates. Surely, a law-abiding business fully supports the idea of solving problems at customs and the need to overcome smuggling. Viktoriia Kulykova. Consumer Electronics Committee Senior Manager. A useful tool for solving this problem may be to reduce the demand for illegally imported goods in the domestic market of Ukraine. This can be achieved by strengthening control over the use of cash registers and gradually expanding the scope of mandatory use of cash registers. For its part, the European Business Association has already asked the President to pay special attention to this issue, in particular - to prevent the weakening of reform and strengthen control and punishment for violations of legislation in this area. Meanwhile, experts believe that reducing the scope of use of registrars of settlement operations (RSOs) can lead to an increase in the shadow economy, and, consequently, have a negative impact on the development of the economy as a whole. After all, in the absence of fiscal checks and effective control over their issuance, unscrupulous entrepreneurs begin to evade the necessary taxes and customs duties. Therefore, there is an urgent need to create transparent, equal, and civilized conditions for doing business, including the introduction of European practices for the fiscalization of settlement operations. According to the official data of the State Tax Service of Ukraine, the systematic introduction of the RSOs for technical settlement operations accounting in the retail trade in consumer electronics in 2016, resulted in the fact that for the first year there was a significant (2.3 times) increase in VAT paid on consumer electronics at end sale points - from UAH 3.3 billion in 2016 to UAH 7.4 billion in 2017. In the future, the amount of VAT paid to the budget increased, respectively, in 2018 - up to UAH 9.6 billion, in 2019 - up to UAH 9.8 billion. That is, in the period 2017-2019, the increase in VAT paid for the sale of consumer electronics amounted to 297%, while VAT payments in all other sectors increased twice less, namely 162%. However, the EBA representatives are convinced that the situation can be further improved: in particular, by increasing the fines for non-issuance of fiscal checks and introducing a mechanism to motivate customers to verify the authenticity of fiscal checks. For example, it is necessary to return to the law the norm on the consumers ability to receive the so-called cashback if a fake check was issued (unfortunately, the rules on cashback were removed from the law before it could have been implemented in practice). According to EBA Consumer Electronics Committee, the volume of illegal imports of certain product categories amounts to 50-70%. To understand the scale of the problem, the Ukrainian budget loses about 33-35 billion annually because of smuggling (11-14 billion hryvnias from illegal oil products, 7 billion hryvnias from machinery, 12 billion hryvnias from alcohol, and about 7 billion hryvnias from medicines). As the problem is already well known and clearly identified, the business community hopes to continue and strengthen the necessary reforms to improve the situation in our country. After all, with such a significant share of illegal products in the domestic market, our economy, as well as legal businesses, suffer from serious losses, especially during the coronavirus crisis. We hope that by joint efforts we will be able to change the situation for the better. Be the first to learn about the latest EBA news with our Telegram channel – EBAUkraine.

On Tuesday, April 6, there was a press conference “The selectivity of control and punishment for violations of the law: negative consequences for the economy ” at which experts in risky areas of trade shared information on the shadow economy. Experts from major associations, including the European Business Association, spoke about the volume of illegal products circulating in Ukraine and how the shadow sector affects the economic performance of both the industry and Ukraine as a whole.

View the video of the meeting

It is no secret that the illegal market causes enormous financial damage to the country’s economy – primarily due to tax evasion which results in the shortfall of the state budget revenues. Moreover, transparent, and perfectly legal business is becoming less competitive and, consequently, being pushed out of the market by unscrupulous entrepreneurs. We should also note the reputational losses for Ukraine and the deterioration of investment attractiveness as companies will not be eager to “enter” the domestic market where fair competition is a losing cause. In confirmation of this fact, the President of Ukraine raised the problem of illegal imports in Ukraine at a meeting of the National Security and Defense Council on April 2. He referred to smuggling as an economic terrorism against Ukraine which costs 300 billion UAH annually to the state budget according to expert estimates.

Surely, a law-abiding business fully supports the idea of solving problems at customs and the need to overcome smuggling.

Viktoriia Kulykova Consumer Electronics Committee Senior Manager

A useful tool for solving this problem may be to reduce the demand for illegally imported goods in the domestic market of Ukraine. This can be achieved by strengthening control over the use of cash registers and gradually expanding the scope of mandatory use of cash registers. For its part, the European Business Association has already asked the President to pay special attention to this issue, in particular - to prevent the weakening of reform and strengthen control and punishment for violations of legislation in this area.

Meanwhile, experts believe that reducing the scope of use of registrars of settlement operations (RSOs) can lead to an increase in the shadow economy, and, consequently, have a negative impact on the development of the economy as a whole. After all, in the absence of fiscal checks and effective control over their issuance, unscrupulous entrepreneurs begin to evade the necessary taxes and customs duties. Therefore, there is an urgent need to create transparent, equal, and civilized conditions for doing business, including the introduction of European practices for the fiscalization of settlement operations.

According to the official data of the State Tax Service of Ukraine, the systematic introduction of the RSOs for technical settlement operations accounting in the retail trade in consumer electronics in 2016, resulted in the fact that for the first year there was a significant (2.3 times) increase in VAT paid on consumer electronics at end sale points – from UAH 3.3 billion in 2016 to UAH 7.4 billion in 2017. In the future, the amount of VAT paid to the budget increased, respectively, in 2018 – up to UAH 9.6 billion, in 2019 – up to UAH 9.8 billion. That is, in the period 2017-2019, the increase in VAT paid for the sale of consumer electronics amounted to 297%, while VAT payments in all other sectors increased twice less, namely 162%.

However, the EBA representatives are convinced that the situation can be further improved: in particular, by increasing the fines for non-issuance of fiscal checks and introducing a mechanism to motivate customers to verify the authenticity of fiscal checks. For example, it is necessary to return to the law the norm on the consumer’s ability to receive the so-called “cashback” if a fake check was issued (unfortunately, the rules on “cashback” were removed from the law before it could have been implemented in practice). According to EBA Consumer Electronics Committee, the volume of illegal imports of certain product categories amounts to 50-70%. To understand the scale of the problem, the Ukrainian budget loses about 33-35 billion annually because of smuggling (11-14 billion hryvnias from illegal oil products, 7 billion hryvnias from machinery, 12 billion hryvnias from alcohol, and about 7 billion hryvnias from medicines).

As the problem is already well known and clearly identified, the business community hopes to continue and strengthen the necessary reforms to improve the situation in our country. After all, with such a significant share of illegal products in the domestic market, our economy, as well as legal businesses, suffer from serious losses, especially during the coronavirus crisis. We hope that by joint efforts we will be able to change the situation for the better.

Be the first to learn about the latest EBA news with our Telegram channel – EBAUkraine.