Ukraine government proposes first wartime tax hikes to fund defence

By Olena Harmash

KYIV (Reuters) - Ukraine's government proposed its first wartime hike in taxes on Thursday to raise billions of dollars in new funds for weapons and military salaries as the war with Russia nears the 29-month mark.

At its weekly meeting, the government approved draft changes to its 2024 budget law, increasing defence spending by 495.3 billion hryvnias ($11.9 billion), government officials and lawmakers said.

Until now, Ukraine has been targeting defence spending of about 1.7 trillion hryvnias for 2024. The changes still need to be backed by parliament and signed by President Volodymyr Zelenskiy before they enter into force.

The government also proposed an increase in taxes and other duties, ranging from a war tax paid by its residents to introducing additional duties on some imports and raising excise duties for fuel.

"The full-scale war is now in its third year, and the needs in the security and defence sector are growing," the finance ministry said in a statement.

"To finance our resistance to the aggressor, we can rely only on our own resources and the main are taxes and domestic borrowing. It will ensure our safety and bring victory closer."

The ministry said the proposed changes were "the softest possible option" to finance additional military needs, adding that only about one-third would be covered by tax hikes.

Kyiv's defence spending keeps rising as the government launched a new drive to strengthen mobilisation efforts and bring more fresh troops to the frontline. Ukraine also focuses on building up its domestic weapon production industry.

To be able to channel more funds to the army, the government proposed various tax increases, planning to raise 140 billion hryvnias in additional revenue.

The government is asking parliament to consider an increase in the war tax for individuals to 5% from the current 1.5%.

The draft proposals published by several lawmakers showed the government was planning to broaden the number of businesses eligible to pay the war tax to include also individual entrepreneurs and micro and small businesses.

The ministry also plans to raise about 362 billion hryvnias from its efforts to reduce a shadow economy and from the domestic debt market.

The government also wanted to cut its planned 2024 budget spending by 65.7 billion hryvnias, including by saving on

foreign debt payments.

Roksolana Pidlasa, head of the parliament's budget committee, said lawmakers would consider the amendments in the nearest future.

For social and humanitarian spending, the government depends on international financial aid. It received about $89 billion from its Western partners in financial aid since the start of Russia's invasion in February 2022.

(Additional reporting by Yuliia Dysa; Editing by Emelia Sithole-Matarise)