The tax increase will bring a corresponding increase in Ukraine’s shadow economy.

Because of the retrospective increase in taxes from October 1, businesses are transferring their workers to the shadow employment sector. This will increase the shadow economy by 10 percentage points, which currently sits at 35%, Andriy Dligach, the founder of the Advanter Group, said.

Currently, more than a third of salaries in Ukraine are unofficially provided. Given the tax changes, it has become profitable for most companies to reduce staff or return to the practice of “salaries in envelopes.” Dligach has long supported increasing the VAT, and the military levy applies only to legal businesses that pay taxes.

“A 2% increase in VAT will bring ₴77B to the budget, and an increase in the military levy will result in a loss of ₴40B, as the state will be forced to raise the salaries of state employees simultaneously. Without the increase, the levy will bring about ₴30B for state employees, or half as much as a VAT increase could,” the expert shared.

Moreover, the VAT increase would have almost no effect on the increase of non-taxed salaries.