Abolition of the SST for Internet providers: why will it not be possible to replenish the budget?

On June 26, appeared column “Why the state should remove FOP from the market of fixed Internet access”, which returned the three-month-old the State Tax Service initiative to the Ukrainian information space.

At the beginning of March of this year, the State Tax Service turned to the Ministry of Finance of Ukraine with a proposal to consider the issue of canceling the simplified taxation system for business entities engaged in the provision of Internet access services. But at that time, this initiative did not receive much publicity. However, it should be noted that on March 5, the Ukrainian Internet Association emphasized the illegality of this initiative and called for its cancellation. In particular, according to Inau, the DPS argumentation is based on a false interpretation of the legislation, because the Tax Code does not include Internet access services among the list of business entities that cannot be single tax payers. Therefore, the Internet Association emphasizes that if the state really needs to deny small businesses in the field of electronic communications the use of SST, then the mechanism of changing the legislation should be involved, and not changing the interpretation of the legislation, as is done by the DPS, while also taking into account the necessary time for entrepreneurs to adapt to new business rules.

Also, in addition to the illegality of the initiative, there are a number of other consequences. InAU emphasizes that the abolition of the simplified taxation system will lead to monopolization of the market. Which is hard to disagree with, because it will in turn reduce the level of competition in the industry. And such steps in the future will directly affect the disappearance of the main competitive advantage of Ukraine compared to many countries – high-quality and fast Internet at a cheap price. The Center for Economic Leadership emphasizes that it was not the state’s intervention in this industry that created the conditions for competition between providers that offer good quality and reasonable prices for the Internet. Therefore, it is worth warning that the idea of ​​canceling the simplified taxation system may become the main factor in increasing the cost and deteriorating the quality of Internet access services, which will directly affect the final consumer.

On the other hand, InAU emphasizes that such a step can lead to the simultaneous termination of services by a significant number of small business operators and will leave a significant number of consumers, especially in rural areas, without communication services for some time. It is also worth considering the factor that some operators will think about it and go into the shadows, thus further reducing the level of tax revenues, and large companies with foreign owners will generally withdraw profits from Ukraine.

As for the experience of other countries, the author of the article gives an example of European countries whose market is represented by 4-5 operators. But you can also cite the example of the USA, where the market is also divided between several large providers (Comcast, AT&T, Spectrum (Charter Communications) and Verizon), which have significant control over the market of Internet services and in fact prevent the possibility of new providers entering the market. Also, in many areas of the US, consumers have limited choices among Internet providers. Studies show that many homes have only one or two provider options. It is clear that we do not condone certain cases of business practices among Ukrainian Internet providers, which masquerade as FOPs in order to pay understated taxes. However, the example of the USA shows what similar ideas with manual regulation of the Internet services market and the desire to create representative offices of a small number of providers can lead to.

Author articles appeals to the fact that, according to approximate calculations, the elimination of the simplified tax for Internet providers can provide the state with 3 to 4 billion hryvnias of additional income per year. But it is worth thinking about what these revenues of 3-4 billion are worth? Maybe here it is still more expedient to review the state policy in the direction of social security and continue steps towards the introduction of a accumulative pension? This is the only way to save budget expenses ten times more. Also, the Center for Economic Leadership once again emphasizes the rejection of impractical populist ideas such as “cashback in Ukrainian”, which is difficult to administer in the first place, and on the other hand, it burdens the state budget in the first place according to their estimates, it is approximately 20-25 billion hryvnias. Therefore, in the conditions of a permanent deficit, before proposals to increase expenditures, it is worth considering whether it is appropriate to then propose ideas for increasing taxes on certain categories, which will bring 5-6 times less income.

It is also necessary to abandon the subsidized policy of tariffs, which, according to experts’ estimates, causes the state budget losses in the amount of about 100 billion hryvnias per year due to the artificial retention of tariffs. It is worth introducing a market price for tariffs for gas, electricity, water, etc., with appropriate mechanisms for providing targeted subsidies to citizens who cannot pay market tariffs for these services and really need help. Another of the most obvious factors is the need to solve the situation with the biggest tax evasion schemes – shadow imports, smuggling, excise goods, etc. Starting from 2017, the colleagues of EEP, ISET and CASE emphasized this in their own research in their research on tax evasion schemes. In particular, overcoming these problems, according to experts’ calculations, can bring 250-400 billion hryvnias annually. And from what follows the next important point – the need to reform the Bureau of Economic Security, the Customs and the Federal Tax Service. Because precisely by strengthening the institutional capacity of these bodies, it will be possible to minimize existing tax avoidance schemes and bring considerable money to the state budget every year.