In the column on “Economic Truth”, UAC Deputy Chairman Mykhailo Sokolov explained why reducing of the VAT rate to 14% for some types of agricultural products is a positive step for the agricultural sector.

With the adoption at the first reading of the bill №3656, which reduces the rate of value added tax (VAT) on some certain types of agricultural products from 20% to 14%, its fierce criticism began.

There have been allegations that the reduction in the VAT rate for agricultural producers will affect processors. It’s like, the tax burden from the shoulders of producers, the state wants to shift on the shoulders of processors. That is not true.

Processors and traders win

I will explain by example. The plant buys milk from a farmer at 10 UAH per liter without VAT, with VAT the cost will be 12 UAH. After processing to the store, the factory sells, for example, for 24 UAH, where 20 UAH is the cost and 4 UAH is VAT.

Currently, the company has a 2 UAH tax credit and a 4 UAH tax liability. Accordingly, there is a 2 UAH tax liability left, which the factory will later transfer to the budget.

What will happen if the VAT rate for agricultural producers becomes 14%? The processor will still buy a liter of milk for 10 UAH without VAT, but VAT will now be 1.4 UAH. Accordingly, the milk purchased from the agricultural producer will cost not 12 UAH, but 11.40 UAH.

Then he also sells his products for 24 UAH. Now he has to pay 2.6 UAH to the budget. It means that the processor will not pay these 60 kopecks at the beginning of the month, when he buys milk from the farmer, but at the end or even in the next month, when he has time to pay VAT to the budget.

The price of raw materials without VAT will remain unchanged, and the price with VAT will decrease. In addition, the fact that the processor will not pay when buying raw materials, he will pay after the sale of finished products.

For him, from the viewpoint of profitability, everything will remain as it was, nothing will change. But the advantage for him will be that he needs less working capital to purchase products. And given that it is mainly credit, it also reduces its charges.

Also, after the implementation of the bill, traders will win, which will also reduce the purchase price However, they also receive additional benefits: with a reduction in the rate, the amount of VAT that stays the same until the budget refund is also reduced.

Including that at the peak export periods, a trader can buy products and sell it a few times per month, reducing the rate by 6% leads to the accumulation of additional working capital at least 10-15% per month. Currently, these amounts simply "hang" for at least 60 days, waiting for a budget refund.

Why 14%?

Now about the size of the rate. Why was it necessary to take 14% and not less than, for example, 10%? To ensure that farmers do not have a situation where the tax credit that is formed, when buying something, does not exceed the obligations that come when they sell their products.

Then, in order for a farmer to receive the same money, he would have to wait for a VAT refund from the budget, which takes very long time, it’s troublesome, and sometimes expensive, even if we do not talk about corruption, but only the cost of accountant officer and lawyers.

Fighting "twists"

Another positive aspect of this bill is that it makes various illegal machinations during the sale of illegal grain less attractive - the so-called "twists". The state loses tens of billions of UAH on them every year. "Twists" - because in a chain of schemes "twisted" various goods.

For example, the company imported bananas to Ukraine and paid 20% of import VAT to customs. Then the bananas were sold for cash. This operation was not officially displayed anywhere.

As a result, the company has both - money and a tax credit, which the state is obliged to reimburse. Then grain is bought and sold for cash.

The company now has a tax liability for the grain sale, which is "twisted" with a loan from bananas and nothing is paid to the budget. But in order for the "twist" to work, you need to buy grain for exactly the same amount for which bananas were officially imported to Ukraine.

Accordingly, at a rate of 14% instead of 20% to obtain the same financial result, the "twist" must pass through itself 1.4 times more shadow grain.

But there is a certain amount of illegal wheat in Ukraine. Therefore, the "twisters" will have to either reduce their turnover, or look for other products to compensate for the shortage of illegal grain.

Any way, this will increase their overhead. That means the bill №3656 makes the scheme of embezzlement of VAT from the state budget is not so attractive.

Therefore, given the benefits that key players in the agricultural sector and the economy in general receive from the implementation of this bill, it should be considered in the second reading and supported as soon as possible.