On March 12, 2025, Ministry of Finance of Ukraine published a report on the implementation of the National Revenue Strategy for 2024, which contains proposals to revise, and in fact eliminate, the simplified taxation system for individual entrepreneurs. Despite official assurance the fact that the government has no immediate plans to increase taxes for this category, a detailed analysis of the document shows that the government is preparing a fundamental transformation of the tax system that could significantly change the rules of the game for small and medium-sized businesses in Ukraine.

It is worth recalling that the National Revenue Strategy for 2024-2030 was developed without proper involvement of the public, business community and think tanks. The document was approved is almost invisible to the general public, and its provisions on reforming the simplified taxation system clearly contradict the election promises of the current government. This lack of transparency in decision-making that affects millions of Ukrainians raises serious questions about the true goals and consequences of this reform.

When we talk about the simplified taxation system in Ukraine, we have to understand that it is not just a fiscal mechanism, but the basis of economic independence for millions of Ukrainians. Since independence, the individual entrepreneur system has become not only a tool for legalizing small businesses, but also a kind of social elevator and an effective mechanism of economic mobility for many citizens. In the face of economic crises and Russian aggression, it was the simplified taxation system that ensured the stability of the Ukrainian economy, allowing people to create jobs for themselves and others.

What does the Ministry of Finance propose?

According to the National Revenue Strategy, the reform of the simplified taxation system envisages several key changes, which together represent a radical overhaul of the entire system.

First, it is planned to gradually increase the single tax rates for legal entities of the third group to the level of the standard corporate income tax rate (18%) over three years, with a further ban on legal entities being on the simplified taxation system. This effectively means the elimination of the simplified system for all legal entities, which will force tens of thousands of companies to switch to the general system with all its bureaucratic and financial complications.

Secondly, for individual entrepreneurs, it is proposed to combine the second and third groups into one with a differentiated scale of rates from 3% (for trading activities) to 17% (for high-margin services). This approach could lead to a multiple increase in the tax burden for many categories of entrepreneurs, especially in the service and intellectual labor sectors.

In addition, it is planned to revise the list of activities permitted for the first group of sole proprietors, excluding high-margin businesses. This may result in a significant number of self-employed individuals losing the opportunity to work legally under current financial conditions.

The strategy also provides for the mandatory use of payment transaction registers (PTRs) for all taxpayers of the unified second group, which will increase the administrative burden on small businesses and require additional costs for equipment and software.

It is planned to make it mandatory for all simplified taxpayers to register as VAT payers if they reach the relevant threshold. This may lead to a significant complication of tax accounting for small businesses and additional costs for accounting services.

The document also refers to the abolition of the institution of registration of an individual entrepreneur. Instead, the status of an entrepreneur will be granted automatically after opening a special bank account. On the one hand, this may simplify the registration procedure, but on the other hand, it will create additional opportunities for control over financial transactions of entrepreneurs.

Prerequisites for reform: control over every penny

Particular attention is drawn to the provision of the strategy on the prerequisites for the implementation of tax reform. The Ministry of Finance in the National Revenue Strategy notesthat the reform of the simplified taxation system will begin only after the measures provided for in subsection 4.2.3(b) “Security of data use and access to information on the amount and turnover of taxpayers' funds in their bank accounts” are implemented.

This condition is of particular concern, as it essentially means granting tax authorities access to taxpayers' banking information - to the movement of funds on the accounts of individuals and legal entities. Such an initiative means establishing an unprecedented level of financial control over citizens and businesses, which directly contradicts the principles of banking secrecy and may create new corruption risks.

The state seeks to be able to track every financial transaction of citizens and entrepreneurs, which, in the Ukrainian context, creates risks of using this information to put pressure on business.

The issue of banking secrecy and protection of personal financial data is fundamental to a democratic society. In developed countries, the access of tax authorities to banking information is strictly regulated and accompanied by strong mechanisms to protect the rights of citizens. In the Ukrainian context, where the institutional capacity of the controlling authorities remains insufficient and corruption risks are high, such powers may become an instrument of abuse.

The real state of the simplified taxation system

When analyzing the current state of the simplified taxation system, it is worth paying attention to objective data that refute many critical arguments about the inefficiency of this system.

As of the beginning of 2025, the total number of sole proprietors under the simplified taxation system is more than 1.6 million people, an increase of 52.5 thousand compared to the previous year. This steady growth, even in times of war, demonstrates the viability and importance of this system for Ukraine's economy.

The structure of the distribution by groups of the simplified taxation system is as follows: the first group - 194.9 thousand people (12% of the total), the second group - 630.6 thousand people (38.8%), the third group - 800.2 thousand people (49.2%), the fourth group - 0.7 thousand people.

The predominance of entrepreneurs in the third group (almost half of the total) demonstrates the importance of this category for the economy. This group includes the majority of IT specialists, consultants, representatives of creative industries, and other highly skilled professionals who form the core of the modern Ukrainian knowledge economy.

In 2024, single tax revenues amounted to more than UAH 55.1 billion, up by UAH 17.1 billion compared to the previous year. This 45% increase is an impressive figure, especially in the context of martial law. It demonstrates the significant fiscal potential of the simplified tax system and its importance for budget revenues.

Criticism of the simplified system: justified or far-fetched?

When analyzing the arguments of critics of the simplified taxation system, in particular those presented in the documents of the International Monetary Fund, it is worth critically assessing their validity and applicability to Ukrainian realities.

The first argument refers to different tax rates and variations in the tax base between groups, which supposedly allows taxpayers to minimize their tax burden. However, it is precisely this flexibility that makes the system adaptable to different types of activities and business sizes, which is a key factor in its success.

The second argument regarding the possibility of switching between the simplified and general taxation systems to optimize taxes has some merit, but it is more about imperfect control than about the problems of the simplified system itself. This problem can be solved by improving tax administration mechanisms without destroying the entire system.

The third argument argues that the simplified system has turned from a tool to support small businesses into a means of tax optimization. This is partly true, but the problem is mainly related to abuses by medium and large businesses, which can be addressed by strengthening control over tax avoidance schemes. Bright example this fight was demonstrated by the tax authorities when they exposed the “business fragmentation” scheme in the Yabko and Yabluka networks, which evaded VAT by more than UAH 286 million through a scheme with 300 related individual entrepreneurs. It turns out that it is possible to expose these schemes without destroying the simplified system, I wonder what has prevented us from doing so?

The fourth argument about pressure on VAT and unfair competition between VAT payers and participants of the single tax system is rather doubtful. Practice shows that most entrepreneurs on the simplified taxation system operate in areas that are fundamentally different from those of large VAT payers, so direct competition is often out of the question.

The fifth argument regarding the problems in the context of labor taxation and informal employment has real grounds, but it is more about the unfair practices of individual employers than about the shortcomings of the simplified system as such. This problem can be addressed by targeted measures without a radical overhaul of the entire system.

Catastrophic consequences of the reform for the Ukrainian economy

The proposed reform of the simplified taxation system could have serious negative consequences for Ukraine's economy, especially in the context of post-war recovery. Let's take a closer look at each of the potential risks.

The first and most obvious risk - This is a blow to entrepreneurial initiative. Raising tax rates to 8.5-17% instead of the current 2-5% (plus military duty) will inevitably lead to a decline in business activity. Thousands of small entrepreneurs, especially in the service sector, may cease operations or move into the shadow sector. Already, according to the Ministry of Economy, there are deceleration economic growth and economic activity: while in January 2025, growth was 1.5%, in February it was only 0.7%. In the first two months of 2025, growth was only 1.1%. If this trend continues, the economy may enter recession as early as the second quarter of 2025.

The second serious risk - Increase in the cost of services and inflationary pressures. The increased tax burden will inevitably be passed on to consumers through higher prices. According to conservative estimates, the cost of many popular services in Ukraine could rise by 10-12%. This will create additional inflationary pressure in an economy that is already suffering from high inflation. Year-on-year, compared to February 2024, prices for increased in February 2025 increased by 13.4%. This will be especially noticeable for the most vulnerable segments of the population, for whom the rise in the cost of basic services may become critical.

The third risk - Loss of competitiveness. Ukraine may lose one of its key competitive advantages - a developed and accessible service market, which was made possible, in part, by a simplified taxation system. This is especially dangerous in the context of European integration, when Ukraine needs to strengthen, not weaken, its economic position. For example, the IT sector, which has become one of the drivers of the Ukrainian economy and provides a significant inflow of foreign currency, is largely based on the model of using individual entrepreneurs. Increasing the tax burden could undermine the sector's competitiveness in the global market.

The fourth risk - outflow of human capital. For many Ukrainian entrepreneurs, especially those in the IT and creative industries, tax changes can be a decisive factor in their decision to emigrate. If tax conditions in Ukraine and, for example, Poland are similar, but Poland has better infrastructure, higher security, and more opportunities for development, the logical choice for many will be to move. In addition, such changes will reduce the motivation for returning to Ukraine for those professionals who left because of the war. In the context of a demographic crisis and large-scale emigration due to the war, this additional incentive to leave could have disastrous long-term consequences for the country's human capital.

The fifth risk – розширення тіньової економіки. Радикальне підвищення податкового навантаження може призвести до зворотного ефекту – замість збільшення надходжень до бюджету, відбудеться розширення тіньового сектору економіки. Якщо підприємці не платять навіть 2-5% від обороту, то тим більше вони шукатимуть способи уникнути сплати 15-17%. Досвід попередніх податкових реформ в Україні неодноразово демонстрував, що надмірний фіскальний тиск призводить не до збільшення надходжень, а до розширення тіньової економіки.

The sixth risk - shrinking middle class. The simplified taxation system has become one of the main tools for the formation of the Ukrainian middle class - economically independent citizens who are not dependent on the state or individual employers. Undermining this system could lead to a reduction in the size of the middle class, which would negatively affect social stability and democratic processes in the country.

The seventh risk - higher unemployment and social tensions. The elimination of the simplified taxation system will inevitably lead to the closure of a significant number of small businesses, which in turn will exacerbate social and economic problems.

Alternative approach: targeted fight against abuse

Instead of destroying the effective system of support for small businesses, it is advisable to focus on targeted efforts to combat the abuses that do exist in the simplified taxation system.

First of all, effective analytical tools should be introduced to detect “horizontal division of companies” - a scheme where a large business is artificially divided into smaller structures to take advantage of a simplified system. Modern data analytics technologies allow for effective detection of such schemes without the need for continuous monitoring of all entrepreneurs.

Second, the option of improving the taxation system for certain high-margin activities without affecting the entire simplified system could be considered. This would allow to address the problem of excessive tax privileges in areas where they can create unequal conditions for competition.

Thirdly, it is advisable to strengthen control over large cash flows and transactions between individual entrepreneurs and legal entities that may indicate tax evasion schemes. At the same time, such control should be targeted and not affect normal business activities.

Нарешті, важливо забезпечити технологічну модернізацію податкових органів, яка б дозволила їм ефективно виявляти реальні схеми ухилення від оподаткування без необхідності тотального контролю за кожним підприємцем. Інвестиції в аналітичні системи та навчання персоналу можуть дати значно кращі результати, ніж спроби змінити всю податкову систему.

Reform as a threat to recovery

Given the continuation of Russian aggression and the dire state of Ukraine's economy, the proposed reform of the simplified taxation system looks not just inappropriate, but potentially dangerous. Instead of creating favorable conditions for economic recovery, business development and the return of Ukrainians from abroad, the government plans to increase the tax burden and establish total control over citizens' finances.

Small and medium-sized businesses, which have demonstrated impressive resilience in the face of war (as evidenced by the growth in the number of individual entrepreneurs by 52.5 thousand over the past year), deserve support, not additional restrictions and fiscal pressure. The simplified taxation system is not just a mechanism for paying taxes, but a tool for economic development, job creation and support of entrepreneurial initiatives.

If Ukraine truly wants European integration and sustainable economic growth, its small business policy should be based on the principles of support and incentives, not fiscal pressure and control. Instead of copying certain elements of European tax systems (the reform of the individual entrepreneur copied from Poland's tax system) without taking into account the local context, Ukraine needs to develop its own model that takes into account both the current realities of the war and the prospects for post-war recovery.

Ukraine needs a balanced and transparent discussion on the future of its tax system that takes into account the interests of all stakeholders and is based on a thorough analysis of the possible consequences of the proposed changes. Only such an approach will allow for the development of a truly effective taxation model that will promote economic growth and social justice.