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Yanukovych Vetoes Ukraine’s New Tax Code

A new version of the tax code will be presented to the Ukrainian Parliament by Thursday after President Viktor Yanukovych has exercised his right of veto the bill, caving in to the largest opposition protest since his election in February.

The new version will be drafted by the president’s office and the government together with representatives of small businesses.

Thousands of entrepreneurs have been rallying across the country for two weeks protesting a reform passed by the parliament that would have made thousands of entrepreneurs no longer eligible for generous tax breaks.

On November 18, Ukraine’s legislature adopted the new tax code that basically abolishes simplified taxation, raises the income tax, and restricts the use of tax benefits. The legislation needed the president’s signature to become law.

The demonstrators say the tax code passed by the Verkhovna Rada is tilted toward the rich and big companies, and will punish small and medium-sized enterprises.

“I vetoed [the tax code] today,” Yanukovych told reporters after a government meeting.

“Protests in Kiev are a manifestation of the democratic process in Ukraine. It is normal and I welcome it,” he added.

The move shows his unwillingness to sacrifice popularity for the sake of reforms, analysts said.

It could also mean that other painful measures, especially those required by an International Monetary Fund program, will be delayed or canceled.

Proponents of the legislation, led by Prime Minister Mykola Azarov, had argued the changes were necessary to balance the national budget and reduce tax evasion.

Ukraine needs to cut its budget deficit to 3.5 percent of gross domestic product in 2011 from the 5 percent to 5.5 percent expected this year under its US$15 billion deal with the IMF.

While neither the government nor the IMF expected the tax code to immediately boost budget revenues, extending tax breaks for small businesses could make it harder for Ukraine to achieve the deficit target and sets a dangerous precedent.

Political experts agreed in opinion that Yanukovych has exercised his right of veto on the tax code because of fear of escalation of the conflict.

“The authority has reasonably estimated risks of the follow-up protest actions, their considerable scale and nature,” Yury Jakimenko, political analyst said to the Kommersant-Ukraine.

“This is negative for the country,” said Citi analyst Luis Costa said to The Moscow Times. “The market consensus was that Yanukovych was going to approve it despite popular resistance we have seen over the last couple of weeks.”

Next year, under the IMF deal, Ukraine needs to start gradually raising the retirement age for women to 60 from 55 and continue increasing the price of gas for households.

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