The Ukrainian government has submitted a draft state budget for 2016 to the country's parliament setting the deficit at around UAH83.7bn ($3.5bn), or 3.7% of GDP, which is in line with the demands of the International Monetary Fund (IMF).

The central budget revenue for the next year is projected to increase by 16.3% y/y to UAH601.4bn ($25.2bn) or 26.6% of GDP. Spending is projected to increase by 15.9% y/y to UAH674.1bn ($28.3bn) or 29.8% of GDP.

An IMF-compliant tax code, drafted by the finance ministry, has put the deficit at 3.7% of GDP, while a rival draft prepared by the parliamentary tax committee has about a 10% deficit. The IMF has already warned Kyiv that this document is unacceptable. The  tax dispute has paralysed progress towards the disbursement of the next $1.7bn tranche to Kyv from the $17.5bn four-year support package for Ukraine that was agreed in March.

The 2016 draft budget submitted to the parliament on December 11 is based on the government's tax reform proposal, with a few compromises, Kyiv-based brokerage Concorde Capital reported on December 14. Specifically, the document calls for the payroll tax to be cut to 20% from an average of 37% currently, the personal income tax rate to be hiked to 18% from 15% currently (which is a compromise as the finance ministry suggested 20%).

The draft also calls for the enterprise profit tax rate to remain flat at 18% in 2016 (the finance ministry had proposed 20%) and to be cut to 17% in 2017. Value-added tax (VAT) rules are proposed to remain almost unchanged at 20% in general and 7% for medicine. It calls for a partial abolition of the special taxation regime for agri-producers, while the simplified taxation system will be denied to enterprises and restricted among individuals.

"The payroll tax reduction is the epicenter of the 2016 budget from which tremors are being felt throughout business. The planned subsequent fall in State Pension Fund revenue prompts the need for a substantial rewriting of traditional taxation rules, as well as spending revisions," Concorde's Alexander Paraschiy said in a note to clients.

The expert added that since the government openly plans for widening the tax base with these changes, small- and meduum-sized enterprises are highly critical of the plan. So are state employees, thousands of which face job cuts.  "Against this backdrop, we can hardly predict when and in what form the budget might be approved, if at all," Paraschiy underlined.

Earlier, on December 8, President Petro Poroshenko urged Ukraine's parliament to approve the controversial tax reform legislation and the state budget for 2016 by the New Year.