Business

The State Audit Office accuses the Ministry of Defence of overpaying VAT on fuel purchases by a billion

Court decisions confirm the findings of the State Audit Service (SASU) regarding the UAH 1 billion overpayment for fuel purchases for the Armed Forces. This was stated by the head of the State Audit Service, Alla Basalaeva, reports

“Yes, the prosecutor’s offices have appealed to the courts on these issues in the interests of the state. Currently, half of the claims have been considered and all have been satisfied in favour of the prosecutor’s office. This fact once again confirms the correctness of the conclusions of the state auditors,”

– Basalaeva said.

According to the SASU, in 2023, prosecutors filed 87 claims to recover “unjustifiably acquired budget funds” from private companies. 48 claims have already been satisfied, and enforcement of court decisions has begun in some of them.

What is happening

The SASU is referring to the contracts of the Ministry of Defence of Ukraine for the supply of fuel to the Armed Forces in 2022. The fact is that on 2 March 2022, at the beginning of the full-scale Russian invasion, the Cabinet of Ministers of Ukraine approved Resolution No. 178. It states that for the duration of martial law, fuel purchases for the Armed Forces are subject to zero VAT. In this way, the government sought to simplify the procurement of fuel for the army and make it cheaper.

However, for some reason, the Ministry of Defence continued to purchase fuel at the standard VAT rate. As you can see, prosecutors have counted 87 cases of such contracts with total losses to the state of UAH 1 billion. The private fuel suppliers that were parties to these contracts now have to pay back the VAT to the state.

Business is against it

Fuel market participants point out that it is virtually impossible to comply with Resolution No. 178, which is probably why the Ministry of Defence has been making purchases without taking it into account. After all, fuel suppliers find themselves in a situation where contracts cannot be fulfilled without losses.

Thus, the director of the consulting agency A-95 Sergiy Kuyun, director of the A-95 consulting agency, notes that the price of these 2022 contracts includes 20% VAT, which suppliers paid when importing fuel into the country. And it is very difficult to get it back.

“Let’s model the VAT flow in this case. Let’s say a tonne of fuel costs UAH 50,000. In addition, at the border, the importer will pay 20% VAT (most likely in credit funds) and receive UAH 10,000 of tax credit to its VAT account. Thus, the importer’s supply costs will amount to UAH 60,000. Since the DOT buys without VAT, the price will be UAH 50,000 (we assume that this is some kind of volunteer oil trader who works without profit). But the VAT account contains 10,000 UAH of VAT, which, for example, cannot be returned to the bank that gave the loan. Theoretically, you can try to get it refunded by the Tax Service, but in reality, this is an unrealistic scenario,”

– kuyun writes.

According to the expert, in order to return these funds to the bank, the entrepreneur must raise the price for the Ministry of Defence by the specified UAH 10 thousand and sell the fuel for UAH 60 thousand. However, this will inevitably lead to accusations of price gouging in the supply of goods to the Armed Forces.

In order to resolve the situation, the expert believes that the government should urgently cancel the resolution on zero VAT. After all, the money that the Ministry of Defence pays for VAT will still go to the state treasury, as it is a state tax. Another way is to introduce a mechanism of tax bills.

“The second option. To use the tax bill mechanism, which has already been well tested for the supply of jet fuel in terms of administering the excise tax. In this case, the importer will not pay VAT at the border, will provide the customs with a bill and will repay it after the Ministry of Defence accepts the fuel,”

– kuyun believes.