Since the beginning of Russia’s full-scale invasion of Ukraine on Feb. 24, 2022, internal state budget revenues have played an even more crucial role in the financial stability of the country. All international financial support Ukraine has been receiving since then has been allocated to everything except defense. That means that Ukraine has only been able to finance its armed forces from internal revenues.
In the pre-war economy, taxes and customs duties were key budget revenue sources. Usually, customs duties alone contribute a significant proportion of the state's income. In 2021, customs duties provided 45 percent of tax revenues, yet based on the results of 11 months of 2022, this fell to 33 percent. Only 57 percent of the customs revenue plan was achieved, which compares to 99% of the revenue plan from the State Tax Service of Ukraine – particularly due to the more active fight against the shadow economy.
Revenues from customs have decreased significantly and not only because of war. Along with objective factors such as a decrease in imports and a number of new customs benefits, the reason for the unsatisfactory work of the State Customs Service (SCS) of Ukraine has been the growth of smuggling and illegal imports, as well as numerous corruption scandals at customs, which have significantly reduced its revenues.
According to a recent statement by the Chairman of the Parliamentary Committee on Finance, Customs and Tax Policy, the state budget had a shortfall of 50 billion Hr. ($1.35 billion) in 2021 and 120 billion Hr. ($3.26 billion) in 2022.
The main reason for the inefficient work of the SCS is the obvious political influence on its management, as well as corruption. One of the key figures in this process is the deputy head Ruslan Cherkaskyi. Having control over the main departments of the central office of the SCS, as well as personnel appointments to the main regional customs offices, illegal material benefits have been obtained. Cherkaskyi makes personnel appointments with the task of collecting unlawful material benefits by facilitating at regional levels the import/export of goods without payment of taxes and fees.
As a result of several meetings of the temporary investigative commission of the Verkhovna Rada on economic security issues, we have already determined and pointed out the negative impact on fiscal stability and economic security. Thus, inefficient customs operating under political influence enables tax-free imports which adversely affects national manufacturers and legal imports by reducing tax revenues. In turn this generates a shadow cash flow and causes a chain effect in corrupting the other state bodies.
It simplifies exports of shadow industry goods e.g., grain purchased by traders for cash from agrarians. It leads to ineffective tax regulation of foreign-economic activity and tax avoidance which makes the National Bank of Ukraine and government implement strict administrative currency control to balance payments deficits.
The unsatisfactory work of the SCS is considered by business to be one of the key state barriers according to an IER survey. Among the limitations, customs formalities were mentioned by 40 percent of exporters and corrupt customs claimed as such by 16 percent of respondents.
As a result of such interference, the SCS operates inefficiently and is considered corrupt, which detrimentally impacts the economy and security of the country.
The scale of violations is so huge that it can no longer go on ignored. That is why, at the beginning of February 2023, the government announced the dismissal of state customs officials.
Last week, there was series of reports from law enforcement authorities on searches and arrests in regional customs offices, including the Odesa branch, which is infamous for several illegal schemes, including the “black grain” scheme.
It’s a positive signal for Ukrainian business and international partners to show the necessary political will to clear customs from corruption. Unfortunately, one bad apple continues to spoil the barrel. Cherkaskyi, who is responsible for most schemes in the SCS, is still hiding on sick leave so that the Cabinet of Ministers can’t dismiss him and the current system of violations can go on.
To ensure Ukraine's financial stability in the war against Russia, along with transparency and trust during the post-war recovery process, it is necessary to restart the reform of the SCS. There are several tasks to that end on the way.
First, as mentioned above, all the corrupt authorities in the SCS and their patrons in top state bodies should be dismissed.
Second, the top management of the SCS, its departments and regional offices, should be selected and appointed only after transparent competition with the majority of international members in the Commission on Election (following the best practices of Specialized Anti-corruption Prosecutor’s Office (SAP) and the National Anti-Corruption Bureau of Ukraine (NABU).
Third, after the renewal of staff, it is necessary to ensure decent salaries, digitalization and an upgrade of customs infrastructure.
Last but not least, to eliminate the risk of future political influence, it is crucial to remove representatives of law enforcement agencies from the customs control zone. Such practice of law enforcement engagement in previous years proved to be ineffective and even harmful.
Customs reform is an ambitious task. It's not quick or easy, but it's definitely worth trying to see it through.
The views expressed are the author’s and not necessarily of Kyiv Post.
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