Recently, the Cabinet of Ministers adopted a resolution that will require contracting authorities to specify estimated value and evaluate bidders’ proposals, excluding value-added tax (VAT). The changes will take effect on July 1, 2026.

This is already the second attempt to introduce this approach—similar proposal was put forward back in May 2025. The revival of this idea is also linked to a new International Monetary Fund program worth up to $8.1 billion. To access these funds, Ukraine must implement a number of reforms, including abolishing the separate income threshold for VAT liability for individual entrepreneurs under the simplified taxation system. The current threshold is over UAH 9.3 million, and it may be reduced to between UAH 1 million and UAH 4 million. This threshold has triggered intense public debate. Changes in public procurement are framed as an additional, but still mandatory, step.

A similar VAT-related approach is embedded in the draft new Law on Public Procurement (Draft Law No. 11520). It provides for determining estimated value exclusive of VAT.

We analyzed how these changes could affect the sector. For this purpose, we examined completed competitive procurement procedures announced in 2024 and in the first five months of 2025.

Data on VAT-payer status for procurement participants and contracting authorities were provided by the YouControl analytical system—we are sincerely grateful to our colleagues for this cooperation, which effectively made this analysis possible. We also recognize that VAT status could have changed during the study period. However, because it is nearly impossible to automatically verify a participant’s VAT status at the time of each individual procurement procedure, we used current-status data.

Summary

Accurately estimating the economic impact of these changes is virtually impossible at this stage. We are unlikely to see the real picture until at least the end of 2026, once the new rules have been in force for six months.

Presumably, the changes will further increase the share of procurements won by VAT-paying participants, who already account for wins in 68.16% of competitive lots by number and 92.14% by value. Cooperation conditions for small businesses are likely to worsen.

The largest impact will be on competitive procurements where VAT-paying participants compete directly with non-VAT-paying participants, approximately 21% of lots by number and less than 10% by value.

However, it is very difficult to forecast whether contracting authorities will actually pay more. The change in evaluation methodology alone is likely to have a limited economic effect. If VAT-exclusive bid evaluation had already been in place during the analyzed period (one year and five months), and participant strategies had remained unchanged, contracting authorities would have paid an additional UAH 250 million, which is less than 0.1% of total contract value.

By contrast, changes in expenditure planning and in setting estimated procurement value may have a more serious effect. Under a worst-case scenario—if all non-VAT-paying contracting authorities add 20% to estimated value as a safeguard—budget pressure could increase to more than UAH 60 billion. Even in that scenario, however, competition could still push actual spending downward.

On top of this, we must account for likely changes in bidder behavior, which are even harder to predict.

Evaluating bids without VAT may also increase price transparency.

In practice, the most difficult adjustment, especially at the beginning, will be for contracting authorities, which will need to adapt mid-budget year. We expect the Ministry of Economy to issue clear guidance with practical instructions on how to calculate estimated value, launch procurement procedures, and conclude contracts under the new rules.

That said, the most significant impact on the sector will likely come not from procurement-rule changes, but from tax reform—specifically, the draft law abolishing the separate upper VAT-liability threshold for individual entrepreneurs under the simplified taxation system. The current threshold is over UAH 9.3 million and may be reduced to UAH 1–4 million, in line with the rules applied to other entrepreneurs.

How the new approach to setting estimated value will work

For now, the contracting authority determines how to announce a procurement—whether the estimated value is stated inclusive of VAT or exclusive of VAT. Bids are evaluated based on their total final price, which includes 20% VAT (or another applicable rate) if the bidder is a VAT payer.

If the changes take effect, the contracting authority will indicate the value inclusive of VAT in the procurement plan, but exclusive of VAT in the procurement notice itself. Bids will also be reviewed exclusive of VAT. If a VAT payer wins, the VAT amount will be added to the bid price at the contract-signing stage. In this way, the final contract value will increase, but it will not exceed the procurement value stated in the plan.

Why exclude only VAT, given that it is not the only tax that differs across businesses? Most likely because VAT is an indirect tax—effectively paid (financed) by the buyer, while the business only administers and remits it to the budget. By contrast, most other taxes—including the single tax for individual entrepreneurs and corporate income tax—are direct taxes borne by the business itself.

Do the proposals align with EU rules?

In the explanatory note to the draft government resolution, the government stated that the changes are consistent with the European approach to estimated-value setting and bid evaluation.

This claim cannot be fully endorsed. Directive 2014/24/EU, which regulates public procurement in the EU, states that contracting authorities must calculate estimated procurement value exclusive of VAT. At the same time, the directive does not regulate VAT treatment at the bid-evaluation stage.

VAT payers among contracting authorities and participants

According to BI Prozorro and the YouControl analytical system, non-VAT payers predominate among contracting authorities, accounting for 78.47%. This is expected, since most of them are budget-funded institutions. The remaining 21.53% of contracting authorities are VAT payers—for example, state-owned enterprises.

If we look at all market participants (in both direct and competitive procurement), the overall status split is similar:

non-VAT payers — 74.76%
VAT payers — 25.24%

Note: In further calculations, we excluded CPV 3300 Medical equipment, pharmaceuticals, and personal care products, because some medicines and medical devices are taxed at a 7% rate. Procurements in preferential categories were not excluded from calculations, since separating them requires manual processing.

In competitive procurement, 88.03% of procedures were announced inclusive of VAT. These procedures accounted for 79.56% of the total value.

In competitive lots, the share of VAT-paying participants rises to 50.56%. This can be explained by the fact that competitive procurements are higher in value, while companies and individual entrepreneurs become VAT payers once they reach a certain annual income threshold. VAT payers also win more often. Over the nearly one-and-a-half-year period we analyzed, they won 68.16% of competitive lots. By value, they accounted for 92.14% of contracts.

How competition may change

In previous years, VAT payers argued that they were at a disadvantage compared with non-VAT payers because they had to add VAT to their bid price. However, as noted above, in competitive procurement they already receive roughly two-thirds of contracts by number and 92% by value. Once the changes take effect, VAT payers will likely win more often, but a substantial increase in their contract share is unlikely. Much will also depend on their interest in smaller lots.

The shift to VAT-exclusive bid evaluation will primarily affect tenders where non-VAT participants compete directly against VAT payers. During the study period, the distribution was as follows:

- only non-VAT participants — 21.66%
- only VAT-paying participants — 57.01%
- both participant types — 21.1%

It is also important to note that, when bids are evaluated exclusive of VAT, the balance may tilt in the opposite direction, with VAT payers gaining the advantage—because they may claim input VAT recovery on procurements they previously made with VAT included. As a result, even where the nominal price of goods is the same, VAT payers’ effective costs may be lower. Under such conditions, there is a risk of small businesses being crowded out of public procurement.

Will non-VAT contracting authorities have to pay more?

This is a difficult question to answer. On the one hand, it is possible to estimate, at least approximately, the economic effect of harmonizing bid-evaluation methodology itself. On the other hand, potential changes in how contracting authorities plan expenditures and set estimated procurement value also need to be considered. Of course, bidder behavior will matter as well, and that behavior may also change. However, in the case of bidders, probable scenarios are significantly harder to forecast.

1. Contracting authorities evaluate bids exclusive of VAT: economic effect

Perhaps the main concern procurement practitioners raise about evaluating all bids exclusive of VAT is that, in the end, contracting authorities may overpay.

Example. A contracting authority allocates UAH 120,000 in its annual plan for a procurement and announces the procedure exclusive of VAT—i.e., with an estimated value of UAH 100,000. Two bidders participate: a VAT payer with a bid of UAH 95,000 and a non-VAT payer with a bid of UAH 97,000. Under VAT-exclusive evaluation, the VAT payer wins. At the contract stage, 20% VAT is then added. As a result, the final contract value is UAH 114,000—which is UAH 17,000 more than it would have been if the authority had signed with the non-VAT payer.

For VAT-paying contracting authorities, this rule change is unlikely to have a material effect. It is already more advantageous for them to announce procurements exclusive of VAT, and they can do so under current rules. If a VAT payer wins, the additional VAT amount included in the contract can later be recovered through input tax credit. By contrast, the changes will affect non-VAT-paying contracting authorities (about four-fifths of all authorities): they cannot recover paid VAT, and the bid that appeared cheapest exclusive of VAT may become more expensive than others once 20% VAT is added.

We analyzed whether winner selection in past procurements would have changed if bids had been evaluated exclusive of VAT, and by how much contract totals would have increased.

For procurements where VAT payers and non-VAT payers competed against each other, we converted bids to net amounts (exclusive of VAT), identified winners based on those net amounts, and added 20% tax if the winner was a VAT payer. We then calculated differences between the final bids of the simulated winners and the actual winners.

If, during the study period, non-VAT-paying contracting authorities had evaluated all bids exclusive of VAT, total contract value would have been UAH 250 million higher than it actually was.

At the national level, over nearly one and a half years, this is a relatively small amount—0.06% of the total value of contracts awarded by non-VAT-paying contracting authorities. This is because these two bidder types meet in tenders infrequently, in only about one-fifth of cases, and differences between their bids were usually minimal, sometimes even less than one hryvnia. Potentially, this gap in final bid value could widen if the new rules are introduced, because non-VAT participants would need to cut prices more aggressively to win tenders.

2. To hedge risk, contracting authorities may plan estimated value and expenditures 20% higher

Because contracting authorities are concerned that they may have to pay more after the reform, they may plan for higher expected expenditures. Some may simply budget amounts 20% higher than before to remain on the safe side and ensure they can procure the required quantity.

The worst-case scenario is that all non-VAT-paying contracting authorities do this in all cases. In that event, demand for local and state budget expenditures could increase by UAH 61.78 billion per year. In practice, the scale will likely be smaller, and this pressure may be one-off: after the first year of VAT-exclusive bid evaluation, there will be actual data showing what costs what in Prozorro and how the reform has functioned. Even so, this underscores the need to support contracting authorities in setting estimated value—and not only to account for VAT correctly.

We will see higher-quality price statistics on Prozorro

Now, if a contracting authority announces a procurement inclusive of VAT, a non-VAT payer may submit a bid within the full estimated value. As a result, that bidder may receive funds that were originally set aside in case VAT had to be paid.

Example. A contracting authority announces a procurement with an estimated value of UAH 120,000 inclusive of VAT. Accordingly, UAH 20,000 of that estimated value is VAT, which would need to be included in the contract and paid if a VAT payer wins. Two bids are submitted: a VAT payer at UAH 119,000 and a non-VAT payer at UAH 118,000. The authority signs a contract without VAT at UAH 118,000. That is already UAH 18,000 higher than the estimated value of the procurement item exclusive of VAT.

In practice, because non-VAT-paying contracting authorities are generally indifferent as to which status of supplier they contract with, they usually have no reason to analyze item value exclusive of VAT. Their priority is to obtain the most economically advantageous bid. Therefore, they may mark the estimated value as “inclusive of VAT” simply to preserve the option of contracting with a VAT payer later.

We examined competitive VAT-inclusive procurements in which contracts were awarded to non-VAT payers. Specifically, we calculated estimated value exclusive of VAT and the gap between that figure and the signed contract amount.

In 70.75% of cases (93,500 lots out of 132,100), the contract value with a non-VAT payer exceeded estimated value exclusive of VAT. The total excess amounted to UAH 3.98 billion, or 7.95% of the initial total value of those agreements.

Two interpretations are possible:

either prices are higher than they could be, because non-VAT payers can submit bids up to the full estimated value in procurements where VAT is included;
or estimated procurement value is understated, and the additional 20% set aside for VAT effectively brings it closer to market level.

We also identified a number of State Audit Service monitoring findings in which violations were recorded when a winning non-VAT bid exceeded the estimated procurement value net of VAT. For example, this occurred in a overhaul procurement for Kyiv City Clinical Hospital No. 1, where the contract was signed without VAT at UAH 59.1 million against an estimated value of UAH 61.1 million inclusive of VAT, and in a procurement for green-space maintenance in Vynohradiv, where the contract was UAH 1.67 million without VAT against an estimated value of UAH 1.69 million inclusive of VAT.

This practice is not widespread, and there are also monitoring cases in which auditors did not identify violations in similar circumstances.

In this context, VAT-exclusive bid evaluation may be beneficial: at a minimum, it can improve how market value is reflected in procurement pricing. At the same time, there is a possibility that the changes will also incentivize non-VAT participants to reduce prices.

Will these changes increase tax revenues?

A significant fiscal effect from procurement-rule changes alone should not be expected. Public procurement participants account for only 1.6% of all active business entities. Of course, part of the overall business-entity count consists of individual entrepreneurs who in practice operate under employment-like arrangements. But even if we compare procurement participants only with legal entities, their share is still below 5%. In addition, VAT payers already win 68% of contracts in competitive lots, which account for 92% of the total contract value in competitive procurement.

In some cases, communities will indirectly finance the state budget, except where VAT is recoverable. This refers to situations in which a VAT payer’s final winning bid (after VAT is added) exceeds a non-VAT payer’s bid. As the calculations above show, however, these amounts are small.

What will change for VAT-paying contracting authorities?

For these organizers, it is more advantageous to announce procurement exclusive of VAT, because even if a VAT payer wins and VAT must be included in the contract value, the tax can later be recovered through input tax credit. In general, they can already announce procurement this way—but the data show this is done in only 13.38% of cases.

In 2024 and the first five months of 2025, VAT-paying contracting authorities signed UAH 25.7 billion in agreements with non-VAT participants. If they had evaluated bids exclusive of VAT, non-VAT participants would have won less often, and the total value of winning bids would have been UAH 600 million lower (accounting for input tax credit). Why this occurs requires additional research.

Contracting authorities can already announce procurement exclusive of VAT, but State Audit Service monitoring conclusions sometimes treat it as a violation when the final contract amount inclusive of VAT exceeds the estimated value stated exclusive of VAT.

For example, in January 2023, state enterprise Dobropilliavuhillia-Vydobutok ran a procurement for pipes. In the procurement plan, it stated an estimated value inclusive of VAT at UAH 7.8 million, but announced the tender itself exclusive of VAT at UAH 6.5 million. A VAT payer won with a bid of UAH 6.48 million exclusive of VAT; VAT was then added in the contract, bringing the final amount to UAH 7.78 million. Therefore, the contracting authority followed the steps the government now proposes to make mandatory. Nevertheless, the Chernivtsi Regional Office of the Western Office of the State Audit Service identified this as a violation, stating that the authority “did not reject the bidder’s tender proposal as one whose price exceeds the estimated procurement value determined by the contracting authority in the open-tender notice.”

However, this is not a consistent agency practice, and opposite decisions also exist. For example, the Odesa branch of Ukrainian Sea Ports Authority, in its annual plan for territory-maintenance procurement, set the estimated value at UAH 7.8 million inclusive of VAT, while announcing the tender exclusive of VAT at UAH 6.5 million. A VAT payer won, and the contract value inclusive of VAT was UAH 6.54 million. During monitoring, the Eastern Office of the State Audit Service asked about the estimated-value overrun, but after the contracting authority’s explanations, found no violation on this point.

Conclusions

In summary, accurately estimating the economic impact of these changes is practically impossible at this point. We are unlikely to see the real picture until at least the end of 2026, once the new rules have been in force for six months.

What can be stated clearly is that the reform is unlikely to produce a major fiscal effect—it affects a very small share of businesses at the national level.

The largest impact will be on competitive procurements where VAT-paying participants compete directly with non-VAT-paying participants, approximately 21% of lots by number and less than 10% by value.

On top of this, we must account for likely changes in bidder behavior, which are even harder to predict.

Evaluating bids exclusive of VAT may also improve price transparency, because it allows comparison of the net cost of goods and services without the indirect-tax component. It may also help reduce prices offered by non-VAT participants.

Ultimately, however, there is another major variable: the draft law abolishing the separate upper VAT-liability threshold for individual entrepreneurs under the simplified taxation system. The current threshold is over UAH 9.3 million and may be reduced to UAH 1–4 million, in line with the rules applied to other entrepreneurs. Tax changes may affect the sector more strongly than procurement-rule changes themselves. The number of non-VAT participants would naturally decline, as they would have to register as VAT payers. And VAT administration is fairly burdensome for entrepreneurs; unless it is simplified, this may affect both the number of businesses and the prices of their goods and services.

This material is funded by the European Union. Its content is the sole responsibility of Transparency International Ukraine and does not necessarily reflect the views of the European Union.

Research team

Project Lead:
Ivan Lakhtionov, Deputy Executive Director of Transparency International Ukraine for Innovative Projects

Author:
Kateryna Rusina, Senior Project Manager at Transparency International Ukraine

ProZorro

Transition to VAT-Exclusive Bid Evaluation: A Study of Likely Impacts