Ukraine. How the pair feels – VAT and subsidies for farmers

15.03.2017

The movement along the reform pathway, where mandatory signs are placed by IMF, led the government to a crossroads of decisions: either leave the special VAT regime for agrarians and stay without the next tranche from the IMF, or abolish this regime, introduce some subsidies and have access to external financing.

The special VAT regime, which existed since 1998, was good for all the participants of the process: directly farmers, large companies and agricultural holdings, businessmen and authorities, and the state itself, which used untimely VAT refund as a resource for offsetting financial gaps. vat reimbursement

Last year, the VAT refund was carried out irregularly, with failures and peaks (see diagram). In June, only UAH 100 million was refunded, but after active disturbancy of business and profile associations, UAH 12.1 billion was paid during the next month, and a record high refund was made in December – UAH 15.9 billion. The time of this payment coincided with the complete cancellation of the special regime. In general, over the year almost UAH 95 billion was paid, or UAH 7.9 billion per month on average.

As long as possible the state delayed the adoption of the painful decision, which to a certain extent was disadvantageous for the state and unpopular among the agrarians. The public criticism of the transfer of the latter to the general conditions of VAT managing reached the peak by the autumn 2016. Representatives of the government tried to explain the situation as best they could. The Prime Minister said he would try to convince the next IMF mission of the need to preserve the special regime, and if he failed, then to allocate UAH 10-12 billion from the state budget to support the agricultural sector. At the same time the Minister of Agriculture promised to do everything to preserve the special regime if only for cattle breeders, vegetable growers and gardeners.

The abolition of the special VAT regime was to be accompanied by revolutionary changes in the availability of information on the terms and amounts of VAT refunds to enterprises. Thus, at a government meeting on September 12, the Prime Minister of Ukraine instructed the head of the State Fiscal Service to create a unified register of VAT refund to businesses "this year", in which priority, timing and refund amounts should be displayed. The state apparatus began to work on this task with squeaks.

The agricultural sector entered the new year with the law "On the State Budget of Ukraine for 2017", in which the special VAT regime for agrarians was completely cancelled and the agricultural sector began to work with VAT on general terms and through a direct subsidy system, for which UAH 4 billion was allocated.

The following questions became the matter in hand:

1. How quickly and in what amount will the VAT be refunded under the new system?

2. How will the VAT refund register and its electronic system work?

3. How will the subsidy system work?

4. What pitfalls will be revealed in the new VAT regime?

vat reimbursementThe dynamics of VAT refund in 2017 is shown in the diagram below. In January VAT refunds were made by amounts that were practically zero – within UAH 100 thousand – UAH 1 million. The maximum amount of UAH 12 million was paid out on January 23. As a whole, in January nearly UAH 28 million was refunded.

In February, the allotments were significant. As a result, UAH 17 billion was refunded, but the average monthly amount was almost the same as in 2016.

In March (first 6 days) about UAH 17 million was reimbursed. The technical process of transferring the electronic system of registers to the Ministry of Finance was the official explanation for the delays in January. At the same time experts attributed this delay to the need to support Ukrainian hryvnia, which lost in value at the beginning of the year (the hryvnia's depreciation in early January was associated with a large VAT refund at the end of 2016). Not paying VAT to large exporters, the state limited the possibility of their entry to the interbank market with funds from VAT refunds for further purchases of foreign currency. Probably, there is something in it.

The other truth, in our opinion, is the fact that the refund was carried out when the Treasury had sufficient funds for this, after covering more urgent government expenditures. As a reminder, the deficit of Ukrainian balance of payments was $ 26 million in January 2017, which was much lower than in January 2016. It means the practice of allocating funds for VAT refunds "whenever possible", apparently, continues.

A new electronic system of automatic, transparent VAT refunds with personal cabinets for each payer is planned to start working beginning from April 01, the Prime Minister says. It will work on the principle of separation of functions – a payer calculates and declares the VAT amount, and the State Fiscal Service checks and gives a green light for payment. Then the Treasury transfers money. However, at least one question arises – if the State Fiscal Service has a need to check the calculation of VAT of the largest payers, then its repayment will be suspended until the results of this revision. In fact, this is an instrument to control the automatic refund mode. From this point of view, it will be interesting to follow the dynamics of check and their effect on the timeliness of VAT refunds. Unfortunately, our state is currently not in such a financial position to completely withdraw from using VAT as a resource for ensuring its current more important government payments.

If everything goes smoothly on paper with regard to the automatic VAT refund from April 1, it cannot be said with regard to subsidies. Not touching now the question of the initial principles of determining the amount of subsidies and corresponding groups of their recipients (support is targeted at the largest and most efficient enterprises), agrarians have already encountered both technical and methodological problems in their application and use.

The leading associations of the agricultural complex appealed to the Ministry of Agrarian Policy with a request to amend the adopted procedure for the allocation of the budget subsidy in 2017. Among all the problems, it is particularly noteworthy that the introduced model of the subsidies distribution actually deprives most farmers of the possibility to receive it in winter and spring 2017, and the established monthly limit on subsidy payments will limit its amount during the high season period in the second half of the year, when the amount of VAT payments will grow significantly.

UkrAgroConsult can draw the following conclusions so far:

1. The refusal of the special VAT regime was made quickly and effectively by abolishing it completely and adopting the relevant law. And it does not matter there were some difficulties for agrarians in getting their money from the previous regime during the "transition period" (January 2017), in connection with their blocking by the State Fiscal Service. This is a small thing compared to state necessity.

2. Judging by the fact that the first official documents on the subsidies receipt were sent to farmers only in late February, when active work has already started, and agrarians have serious claims regarding the procedure for implementation of subsidies, this shows a half-baked preparedness of the reform.

3. Taking into account the increasingly complicated possibilities of external credit financing this year, the need to pay external debts and the growing tension in financing state programs, the risk for the program of farmers’ support in the form of subsidies increases (especially in comparison with the performance of the previous special VAT regime).

We tried our best, you know the rest? It’s still early to draw such a conclusion. But the Ministry of Agriculture must quickly remedy the situation, so that most of farmers could take advantage of the state support in the new form, and this would not lead to decline of their competitive positions.

 

UkrAgroConsult

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