KIEV, June 17 – Parliament, led by the governing coalition, on Thursday gave first-reading approval to a tax code that reduces corporate taxes, but may eventually create additional problems for small- and medium-sized businesses.

The 500-page bill, which was approved by 247 lawmakers in the 450-seat Parliament, seeks to cut corporate tax to 20% from 25% in 2011 and gradually reduce it to 17% in 2014.

The bill calls for gradual slashing of the value-added tax (VAT) - the tax which provides most of the government’s revenue - to 17% from 20% between 2012 and 2014.

The bill allows the government to issue tax breaks for certain companies and creates offshore territories in Ukraine that may be used by some businessmen for minimizing taxes.

It also gives the tax authority the power of freezing bank accounts and other assets, while tax inspectors may get permission to break in and search homes of those they believe are avoiding taxes.

“It’s nothing good, only new challenges,” Viktor Pynzenyk, a former finance minister, said in comments posted by Ekonomichna Pravda online newspaper. “It’s a controversial, non-systemic paper that doesn’t agree with other elements of economic policy.”

Although the reduction of major taxes, such as corporate tax and the VAT, may stimulate economic activity, it may be efficient only when the government agrees to cut its spending at the same time.

“The government demonstrates no action in this direction,” Pynzenyk said.

As a result, the government may be forced to step up administrative pressure and use other tricks, such as delay with tax rebates, to try to extract greater tax revenue from the economy.

Pynzenyk expects Ukraine’s 2010 budget deficit will reach 170 billion hryvnias in 2010, or 16% of the GDP, that is much greater than 5.3% deficit that the government had predicted.

The Tax Code leaves individual income tax at 15%, but increases the tax to 30% on revenue obtained from winning lotteries, except for the state lottery, which will still enjoy 15% tax.

Wages of coal miners and state rescue workers will be taxed at 10%, according to the code.

The government also plans to slap 5% tax on revenue earned from depositing money at banks.

The Tax Code also cancels 10 small and non-significant local taxes and fees.

Meanwhile, the bill approved on Thursday has several striking changes compared with a draft that had been outlined by the government on Monday.

Firstly, the real estate tax on large apartments and houses that the government has originally planned to introduce, vanished from the bill.

Also, the 17% tax bracket as individual income tax on wealthy people, appears to be abandoned.

“This is a historical case. They lost the real estate tax on the way from the Cabinet of Ministers to Parliament,” Andriy Pyshniy, an ally of Arseniy Yatseniuk, an opposition lawmaker, said.

“The same problem happened with the 17% income tax on the wealthy people. It got lost! The wealthy people have a party,” Pyshniy said.

“They think the Ukrainians are stupid and that we will again believe in just another fairy tale about magic transformation of political dinosaurs into young reformers,” Pyshniy said. (tl/ez)