TCS Daily

"If It Moves, Tax It"

By Larissa Apasova - November 13, 2003 12:00 AM

Ronald Reagan's famous remark about the government's view of the economy at the White House Conference on Small Business in 1986 -- "If it moves, tax it..." -- still applies to many governments. In recent years, the government in the Ukraine has attempted to improve the development environment for small- and medium-sized enterprises (SMEs). But these small businesses are still spending a lot of effort and energy just surviving instead of developing.


The National Coalitions Program asked about 150 business associations to describe the most painful problems hampering SME development. The results of the survey of entrepreneurs demonstrate that they regard instability and deficiency of the legislation as one of the major problems they face. This especially applies to taxation. Ukrainian legislation on taxation is rather cumbersome and intricate, while the tax burden on SMEs is extremely onerous.


One of the major efforts to resolve the problem was the introduction of a simplified system of taxation. This system is regulated by a large number of legislative acts that are absolutely uncoordinated and oftentimes contradict each other. The situation was further aggravated by subsequent modification of the simplified taxation regimes in the draft of the new Tax Code. This practically eliminates simplified taxation for SMEs and entrepreneurs.


Improving and preserving the existing simplified taxation system for small business is the key factor to the creation of the middle class in Ukraine, since currently small business employs more than 3 million people, produces a considerable part of consumer goods and services, and provides for more than 20 percent of revenues to the state budgets of all levels.


Increases in the state budget, the numerous deficiencies of the legislation regulating inspections of enterprises, undetermined rights and responsibilities of controlling bodies (which often incur imposition of huge ungrounded penalties on enterprises and entrepreneurs) -- these remain critical constraints to small business development. The existing legislation does not stipulate a clear procedure for inspections of enterprises and does not specify the functions and rights of the numerous controlling authorities. As a result, the possible economic impact is lost upon all parties involved in the social-economic processes: state (budget revenues), society (jobs, social taxes, economic development of the regions), and entrepreneurs (loss of business, jobs, income).


According to the existing legislation, more than 30 controlling organizations are authorized to conduct inspections of enterprises. The legislation regarding the activity of these authorities includes 2 Codes, 30 Laws of Ukraine, 5 Presidential Decrees, 17 CMU Regulations, 11 acts by various ministries, and a large number of regulations referring to the activity of tax authorities. A considerable shortcoming is the fact that every authority introduces its terminology, methodology, and develops its own unique interpretation of its own rights and responsibilities with regard to enterprises. This is one of major reasons for the legislative chaos in the sphere of inspections. Predictably, SME owners feel insecure, which results in corruption and hampers the development of the private sector.


The entrepreneur hotlines and business associations have seen plenty of instances of paralyzing or even closure of entrepreneurial activity during inspections or as a result of penalties and sanctions. It's no wonder that SME owners want to be protected by a more effective law.


Larissa Apasova lives in Kiev. She is the author of Keys for Success: What Should the Beginner Entrepreneur Know?

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