Recently, the Cabinet of Ministers adopted a resolution that will require contracting authorities to indicate estimated value and evaluate bidders’ proposals excluding value-added tax (VAT). The changes will enter into force on July 1, 2026.
Standardizing the approach to bid evaluation in public procurement, regardless of tax regime, is one of the prior conditions set by the International Monetary Fund for opening a new extended financing program worth up to $8.1 billion.
According to a study by TI Ukraine’s DOZORRO project in cooperation with CEP KSE, this change will have a limited impact on competition in procurement.
As it stands, VAT payers already account for 92% of total contract value and 68% of wins in competitive Prozorro procurement. These are the participants that will gain an advantage if bids are evaluated excluding VAT. Accordingly, the proposed changes may further reduce the share of public contracts awarded to small businesses that are not VAT payers.
The greatest impact will be on competitive procurement where VAT-paying and non-VAT-paying participants compete against each other—about 21% of lots by number and less than 10% by value (excluding medical goods procurement). Shifting to VAT-exclusive bid evaluation could lead to a slight increase in budget spending—approximately 0.06% of the total contract value of non-VAT-paying contracting authorities. This is the percentage by which contract totals would have changed in the study period if VAT-exclusive evaluation had already been in place and bidders’ strategies had remained unchanged.
The most serious challenges and the weaker economic effect may come from changes in expenditure planning and estimated-value setting. There is a possibility that, after the reform, some contracting authorities will add 20% to planned expenditures and estimated procurement value to ensure they can fully meet existing needs. Under this worst-case scenario, annual budget expenditures could increase to over UAH 60 billion. Competition could still adjust this figure downward.
“The adopted changes are aligned with the bid-evaluation approaches set out in Draft Law No. 11520. Overall, harmonizing approaches is a positive step. However, the real impact on the procurement sector is difficult to forecast at this stage. These are yet more changes that non-VAT-paying contracting authorities will once again have to adapt to. It would be good for the Ministry of Economy to make this transition clearer and less stressful for them,” summarizes Ivan Lakhtionov, Deputy Executive Director of TI Ukraine for Innovative Projects.
Changes in the tax system may have an even stronger impact on procurement—namely, abolishing the upper threshold for VAT payment for individual entrepreneurs under the simplified taxation system. If Parliament adopts the relevant draft law, the number of non-VAT-paying participants will naturally decrease, as they will have to register as VAT payers. In addition, VAT administration is fairly burdensome for entrepreneurs, so unless it is simplified, this could also affect both the number of businesses and the prices of their goods and services.
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These are yet more changes that non-VAT-paying contracting authorities will once again have to adapt to. It would be good for the Ministry of Economy to make this transition clearer and less stressful for them
Ivan Lakhtionov
