You're reading: Ukraine adopts new tax code amid protests

Nov. 18 (Reuters) - Deputies in Ukraine's parliament loyal to President Viktor Yanukovych pushed through a tax code on Thursday despite street protests from small entrepreneurs who said it would drive millions of them out of business.

Plans to reform the ex-Soviet republic’s notoriously bad tax system have triggered the biggest public protests against the Yanukovych government since his election in February and galvanised a fractured political opposition.

The government is under pressure from major creditors like the International Monetary Fund to reform an inefficient tax system which ranks third worst in the world after Belarus and Venezuela, according to a World Bank survey of 183 countries.

As part of plans to rebalance the budget and satisfy the IMF, parliament adopted a plan to abandon tax breaks for millions of small businesses who represent Ukraine’s emerging middle-class.

Parliament, where Yanukovych’s Regions Party leads a majority, passed the new tax code after two days of debate as 2,000 small business owners protested outside parliament, saying the reforms favoured the super-rich.

The new tax code will gradually reduce corporate income tax and value added tax rates, but it will also significantly broaden the category of those small businesses which will have to submit details of their operations to the state tax inspectorate, and pay 25 percent of their profits instead of fixed payments.

This will immediately take in a huge number of people like market traders, taxi drivers, cafe owners and street kiosk operators who have until now simply made monthly ad hoc payments to district tax officials.

Critics predict thousands of people will now be forced into a "shadow" economy in which they "massage" their profit submissions and lie about the number of people they employ.

Some provisions of the tax code will take effect as early as January 2011. Others will come into force later.

COSSACKS AND OUTLAWS

"After this tax code comes in, we will all be playing a game of Cossacks and outlaws; the Cossacks will be the tax inspectors and the outlaws will be the whole country," opposition deputy Serhiy Mishchenko said in parliament before the vote.

The new tax code will reduce the number of people small businesses can employ and force them to register their businesses with the tax inspectorate.

The situation is complicated by the fact that tax inspectors in Ukraine have, like traffic police, a reputation for corruption. Many small businesses see not just their taxes going up, but the levels of payments they will have to make in bribes.

The former Soviet republic needs to cut budget deficit to 3.5 percent of gross domestic product next year from this year’s five percent under the terms if its $15 billion IMF deal.

But even the Fund has reservations, saying that in the short term the proposed tax code will not immediately generate extra income for the budget.

Protesters outside parliament on Thursday carried signs that read "Down with the tax code". "The tax code is too much of a burden for us. If it is passed, we will die off," said one demonstrator, Hryhoriy Busol, a furniture trader.

Popular resentment against the tax reform plans injected the fragmented opposition with a new lease of life.

Deputies from the BYuT bloc led by Yanukovych’s long-time foe Yulia Tymoshenko scuffled with members of the ruling Regions Party before the vote and emptied buckets of coins into the government lodge.

The Tymoshenko bloc read out an appeal from the protesters, urging Yanukovych to veto the bill if it was passed. His office says he will first need to study the final version of the bill. As in many other ex-Soviet republics, businesses often choose to pay bribes instead of taxes, a practice that saves time and money but brings nothing into the national coffers.