The sixth episode of Season II of Budget Talks focuses on taxes and fees during wartime. Will tax rates increase? How do Russian attacks and shelling affect budget revenues? Will taxes for Ukrainians go up after joining the EU? And what does the “service-based approach” being introduced by the Tax Service actually mean?
In this new episode of Budget Talks, we address these and other pressing questions. Viktor Maziarchuk, Head of the Center for Fiscal Policy Research, speaks with Lesia Karnaukh, Acting Head of the State Tax Service of Ukraine, about new approaches and changes in the agency’s work.
VIKTOR
Good day, dear friends, viewers, and listeners. This is Budget Talks. In this episode, we’re discussing how the budget is formed and how funds from the state and local budgets are used. And I’ll be honest—as we always are here—it’s a real pleasure for me today, because sitting across from me is Lesia Karnaukh, Acting Head of the State Tax Service. Or, to put it simply, someone I can call a friend—a person I’ve worked with for quite a while at the Accounting Chamber.
Lesia, it’s a real pleasure to speak with you here today.
LESIA
Viktor, thank you sincerely. In fact, our professional path together started even before the Accounting Chamber—let’s be honest. That was quite a while ago. Back then we weren’t talking about the revenue side of the budget but about the expenditure side. Those were slightly different times, but yes, our joint work began a long time ago. And it’s also a great honor for me. Thank you very much for inviting me. I’m ready today to be completely open and candid so we can share what we live by and what we’ve been doing for the last 20 years.
VIKTOR
So—to just be yourself.
LESIA
Exactly.
How the State Tax Service builds dialogue with taxpayers
VIKTOR
You were recently appointed Acting Head of the State Tax Service. How does it feel?
LESIA
You know, probably not as daunting as it could have been. I’m quite an ambitious person. I’ve always known that I want to work for the state—and that I will. I worked toward that goal. I’m a lawyer by training, so at the start of my career this position seemed almost like science fiction to me, the tip of the iceberg. But now, after some time in the role, I see it’s about great responsibility—it’s daily, meticulous work with numbers, with people, with analysis. So I try to apply all the experience I’ve gained to do what’s needed for the country in this very important position—especially during wartime.
VIKTOR
Of course, it’s businesses and citizens who pay taxes, but you administer them. And at this moment in our history, that’s a critically important task. I want to read a quote from your first day in the job: “I hear myths about scary tax officials every day. Since the start of the year, our team has achieved significant results. But our ambition is much greater—to change the philosophy of the State Tax Service, to show that we are not an enforcer but a partner, and not just a controller but also a service provider.” How are you going to achieve these goals and convince Ukrainians they don’t need to fear tax officers?
Before you answer, let me give a personal example. First, I want to thank my tax inspector in Ternopil. I had such pleasant interactions on various issues—sometimes I’d make a mistake, and they would just say: “Please correct this here.” Once I had a question about tax overpayment, and it took us a while to reconcile the figures so there would be no overpayment. So thanks to the Ternopil tax inspector—and not just in Ternopil—for providing such a high-quality service with a human face. I know there are many such cases. How will you scale them up?
LESIA
Well, that’s actually the result of our team’s work over the past six months—we started building communication, starting a dialogue. When our team came into the State Tax Service, we felt the work was very closed off, with a huge distance between the Tax Service and the taxpayer. Internal communication was also quite limited—people operated within their own department, their own regional office, their own local tax inspectorate, without a sense of being part of a single, unified team.
So right now, I’m working in two directions. First, we’re continuing the path of simple, straightforward conversation. You’ve just given the answer yourself—what do taxpayers expect from us, what does anyone who wants to talk to the tax service expect? A conversation. An explanation. A clarification. Not everyone has to be an accountant or an auditor. We have many people in business who don’t have formal training in finance—and they don’t have to. That’s what tax inspectors are for: to explain where a tax liability comes from, why it’s that amount, which document to submit. That’s the essence of the service-based approach we want to embed in the State Tax Service.
As for resources—and what’s often called the “punitive” side of our work—historically, and I see this now, we spend a lot of resources (human, time, financial) on control functions. In other words, we’re always looking for mistakes. That’s a philosophy found in many agencies—we saw it at the Accounting Chamber too. But our primary focus should be on prevention: explaining, clarifying, creating a system of service and administration so that people who have no intention of cheating the state simply don’t have the chance to make a mistake.
It should be digital, convenient, and intuitive—so that the taxpayer feels comfortable and isn’t lost in a mountain of tasks and paperwork. At the end of 2024, a global taxpayer survey was conducted using the World Bank’s methodology, and the results showed that the biggest frustration for taxpayers is the constant changes to legislation and reporting forms. They don’t know where to submit them. So the main recipe is to love your work—and I tell my staff this every day—to do it, to explain, and not to be afraid of communication. That’s where I see the core value and mindset shift in the State Tax Service’s approach—working for the benefit of the state and the taxpayer alike.
“In many regions, we kept hearing the same phrase: ‘In 15 years, no head of the tax service has ever visited us.’”
VIKTOR
Watching how the Tax Service has communicated since Ruslan Andriyovych and your team came in, I’ve noticed you’re constantly traveling around the regions. Have you visited all of them, or are there still some left? And maybe you could share some insights from these trips—what stood out the most?
LESIA
We’ve managed to visit 12 regions so far. This practice will continue. We’re already planning to visit two more Ukrainian regions in early August. It’s very important because it gives us the chance to directly hear what’s on people’s minds. Each region of Ukraine has different business conditions and specific features. For example, western and central oblasts are predominantly agricultural, while the eastern ones are more industrial. Naturally, this affects how taxes are administered, the types of taxes collected—it affects everything.
That’s why we will definitely keep traveling, to see things on the ground and hear from the grassroots level. In many regions, we kept hearing the same phrase: “You know, in 15 years, no head of the tax service has ever visited us. No one has ever talked to us.” And that’s very striking. I was especially proud to go to Sumy. We prepared for that meeting and held it in a deep shelter. For us, it was a challenge, given the proximity to the front line and the intensity of shelling from the enemy. People still came to meet us, and I was deeply proud of that. That meeting was important to us. For the first time, I truly felt the phrase: “Unbreakable people of an unbreakable country.” That’s exactly about those business owners.
One of the participants—a company director—had to leave the meeting because, just as we were arriving in Sumy, an aircraft was launched and a missile was intercepted. Unfortunately, that missile still struck his business premises—right during our meeting. Yet they were still asking questions. It was incredibly dignified to see that, under the toughest conditions, these people try to preserve elements of a normal, healthy, prosperous life. If they can live and work like that, I have no right to work any other way. That was a truly moving story for me.
Another striking story came from Chernihiv. A representative of a large agricultural company specializing in cattle breeding came to us with a very down-to-earth, practical issue. He said: “Look, here’s the situation. We provide jobs, we pay personal income tax (PIT). But I have a very practical question: should I keep the cattle in those frontline villages, or should I move them? If I move them, people will lose their jobs. And without jobs, there’s no PIT revenue.”
These are issues rooted in the real, everyday conditions of doing business. It makes you see tax administration differently. Behind every tax invoice, every adjustment calculation, every tax return, you see human lives. And you approach it differently—you understand how much an ordinary Ukrainian, an ordinary entrepreneur or citizen, does to pay that tax, and you treat that responsibility very seriously. These are the stories that touched me the most.
VIKTOR
Thank you. Of course, we all thank the Armed Forces of Ukraine for protecting us and giving us the ability to breathe in a free country—and we also thank entrepreneurs and taxpayers, who ensure the Armed Forces have the means to fight and defend our independence.
Let’s move to some more professional matters. I don’t remember all the figures, so I might check my notes. Recently you announced that the revenue plan is being met and even overfulfilled, with tax revenues increasing. Tell me—how is this happening? Are you pressuring businesses, saying: “Come on, the army needs money”? Or what’s behind this effectiveness?
On Personal Income Tax and the Military Levy
LESIA
Viktor, as an economist you know very well—there’s never just one reason. It’s a combination of factors, from legislative changes to real-world circumstances, to how global market prices affect traded goods, to our relations with partners worldwide, to our trade balance, to domestic production, and to the desire of businesses to stay in this country and create their products.
So there are many components. But if we speak in numbers, the annual target was quite large—over 1 trillion hryvnias. For the first half of the year, the plan was around 600 billion. That was the target set for us in the state budget. We managed to exceed it by more than 10%—by 61 billion hryvnias. We’re genuinely proud of that, because every single hryvnia of expenditure strengthens our state.
A big share—the lion’s share—comes from our citizens through personal income tax (PIT). So first of all, I want to thank all citizens who are officially employed and make it possible to pay PIT. And I also want to urge those who still think that getting paid in cash “off the books” is somehow better for them—it’s not. Because in that case, you’re not contributing to the services the state could provide you if you paid income tax properly. Of course, another factor is the increase in the military levy rate. We’ve seen significant growth from it. There was a lot of public debate—should we raise it or not? My personal view is: people, we are at war!
VIKTOR
Something people often forget.
LESIA
Yes—we are at war! On social media, people criticize and complain that defense production isn’t scaled up enough, especially during nighttime air raids. Sometimes they even dare to criticize our air defense, saying it’s not doing its job. But everything costs money. That’s how the world works: weapons cost money, their production costs money. That’s why I personally believe, and the figures confirm, that the higher military levy has given us the ability to fund and increase defense spending.
We also see positive dynamics in excise tax revenues. There were some legislative changes there too. Consumption volumes haven’t dropped, so businesses continue buying excise stamps at the same rate. We’re grateful for that. VAT from domestically produced excisable goods has held steady, and we’ve seen growth in excise from imported goods. At the same time, there are negative trends I want to address, because they’re important. Due to Russian aggression, we’ve had significant destruction. Every time a production facility is hit, the central office here in Kyiv worries a lot—because we know that immediately means lost VAT revenue. And we already operate with a very tight plan—right at the edge. That’s why our categorical position is not to pressure businesses or squeeze them dry. Businesses must have honestly earned working capital—and we fully understand that—so they stay motivated to keep going and create added value.
We face major difficulties with rent payments [royalties on extraction of natural resources]. Output has dropped due to attacks and shelling. This is a trend we didn’t factor in… or rather, it was factored into the state budget on a different assumption.
VIKTOR
So the worse scenario came true.
LESIA
Yes—unfortunately, the worse scenario played out. And as someone who knows what macroeconomics and macro indicators are, you understand that when planning state budget revenues, we use the most realistic forecast possible—but even the most realistic forecast doesn’t always come true.
How the war affects tax revenues
VIKTOR
What should be done in a situation where rent payments—which are quite substantial—may decrease for objective reasons? This isn’t about the tax service or about businesses. The problem is that enterprises are being physically destroyed—enterprises that provide jobs, pay wages, and pay taxes. Has there been any discussion of changing priorities, of how to ensure these high budget revenues in such circumstances?
LESIA
Even though the conditions we live in—wartime—are completely unpredictable and can disrupt any theoretically projected scenario, the laws of economics still apply. No one has canceled them. If there is growth in economic activity, there will be growth in tax revenues. If there are no prerequisites for economic growth—and unfortunately, we’re seeing a trend toward either stabilization at current levels or decline in economic activity—the picture changes. It varies by sector.
For example, our retail trade and service sectors haven’t stopped; they’re still growing, and we can see that. But manufacturing has been hit hard. And here’s the point: since the days of the Roman Empire, when the first codified legal norms appeared, there have only been two basic options—either expand the tax base or increase tax rates to raise more revenue. We all remember stories about how instead of collecting one coin, they started collecting three.
At present, I’m not aware of any plans to raise tax rates or broaden the tax base. Moreover, in one interview our President said that the tax system will be reviewed to make it fair and aligned with the needs of rebuilding our country—but that we will definitely not do this during the war. Because during wartime our main task is to defend ourselves, survive, and win. For now, we’re doing everything we can to change our approaches in order to maintain stability. We are also working on European integration, which is a key national development priority. In early June, we successfully passed the screening for our Chapter 16. Together with the Ministry of Finance, we reviewed our obligations.
I should note that joining the EU in the area of taxation does not mean that the new member state immediately faces maximum rates for all taxes. It’s a long process, a gradual transition. Preparing for our conversation, I reviewed our materials again. For example, the EU’s well-known value-added tax (VAT)—depending on what each economy can sustain—has an average rate across countries ranging from 15% to 27%. In Ukraine, it’s 20%. So as of now, our VAT rate is already within the EU’s average range. At the same time, there are nuances related to ensuring that all taxpayers actually pay, and issues we need to align regarding reduced VAT rates.
One of the challenges in our legislation is tax benefits and exemptions. They are necessary, and they can have a positive effect—especially in areas where development is needed and the state wants to provide support. But they can’t be abused, because exemptions make administration more expensive. You have to monitor and calculate carefully, to ensure no one is, pardon the slang, “gaming the system.” And yes, that does happen, and it is costly.
So our future development depends on two things: first, the state—together with the Ministry of Economy—actively supporting growth in economic activity; second, treating state budget funds as the main resource for our survival, using them as responsibly as possible. And of course, communication, dialogue, explanation, and even supporting taxpayers so that paying taxes is straightforward and convenient.
Will taxes go up for Ukrainians after joining the EU?
VIKTOR
You touched on the topic of aligning our legislation with the EU’s. At the request of the CASE Ukraine think tank, the Kyiv International Institute of Sociology conducted a survey asking: “Why do you think ordinary citizens might not want to pay taxes?” The most common answers were: because of low incomes that don’t allow for a decent standard of living—80%; and because of the belief that paid taxes are stolen or wasted—74%. What can the Tax Service do to improve public perception, so that paying taxes is not only seen as necessary but, as our previous guest Oleksandr Yabchanka—a soldier and former civic activist—put it, as a civic duty?
LESIA
While you were speaking, I remembered a small corner shop built in the late 1980s. It was important because, after the village store, it was the main shop in that neighborhood—especially for older people who didn’t have to walk far for bread. This is an image from my childhood.
Around that shop lived mostly people whose incomes came from pensions or from help from their children. These were my neighbors when I stayed with my grandparents—not wealthy or highly solvent people. But even the elderly neighbor who uses her pension to buy bread there is already paying tax, and I’m grateful for that—because when she buys bread, she pays VAT.
That’s why I believe we must keep explaining—something my team and I are doing and will continue to do—that the state is structured in such a way that taxes are everywhere and everyone pays them. And it’s not just income tax—there are other taxes people pay: excise taxes, for example, if someone smokes. And many Ukrainians smoke or consume alcohol.
VIKTOR
The so-called “sin tax.”
Taxes aren’t as scary as they seem
LESIA
Exactly. Taxes aren’t as scary as they’re made out to be. Sometimes we don’t even notice we’re paying them every day. The key is to explain, to talk about it, to teach. The word “tax” itself isn’t something terrible—it’s a condition of survival. We pay for services, right? When we go to a salon, when we go to a hairdresser, we pay for the service because we receive something in return. In the same way, we should pay the state for the services it provides.
That’s the first part—raising tax awareness and literacy through simple, practical examples is very important.
As for the second part of your question—it’s unpleasant when you’ve earned something honestly and it’s stolen from you. Many of us have experienced getting our wages in cash back in the day—putting them in our wallet—and having them stolen on the way home.
VIKTOR
Yes, there were a lot of those stories.
LESIA
Or when you got your first mobile phone and kept it in your back pocket, only to have it stolen. After that, you never carry it there again. Of course, it’s unpleasant, and you don’t like the people who took your wallet or your phone. That same instinct should exist in every public servant and law enforcement officer—to ensure there is no large-scale abuse. I’m not from law enforcement; I represent a regulatory body. I can’t speak to the exact level or scale of theft—I don’t have those statistics. I don’t like to speak in generalities.
VIKTOR
This is more about public perception—how do you change it so that people don’t assume money is being stolen? Will openness work? Remember the story about rebuilding Kyiv region? When we were talking, you said: “We’re ready to open the documents and show: friends, we’re not stealing. What do you want to see?”
LESIA
Thank you, Vitya, that’s nice to hear. I sometimes joke that after working at the Accounting Chamber, your mind becomes “spoiled” in a way—you immediately think: did we achieve the result? And was the way we achieved it efficient, economical, and rational? That thinking stays with you.
VIKTOR
It does.
LESIA
I notice that this approach we used at the Accounting Chamber for analyzing and auditing state systems and processes is still very present in my work—whether in the Kyiv Regional Military Administration or now. You remember when we began discussing what we needed—we asked ourselves whether we could achieve the planned results with the resources in the regional budget, especially after the Russians left and so many communities were destroyed. So, I don’t have a magic formula for changing perceptions. But in my 20 years of public service, I’ve developed one principle: just do your job—do it in a way that’s interesting to you and that you believe is right. If you’re leading a team, unite them around shared values and results.
Always work toward the goal. For example, in the Kyiv Regional Administration, when we restored a health clinic in Hostomel—I was responsible for healthcare—walking into that clinic and seeing the nurse beaming as she showed how it had been destroyed, with equipment shot up, and now it was clean and bright—that’s when you realize the people in that community will feel joy coming into a modern, well-kept building. That’s how the state should show itself—through beautiful, modern, high-quality services and facilities. When you walk into a tax office and see trash in the middle of the floor and chaos, you won’t think about good service—no matter how much the inspector smiles. Your surroundings will affect you. So for me, state presence and state “propaganda” should mean proper, well-maintained, quality services. That requires funding. And that means—not stealing.
No Conspiracies: Transparency Is the Best Strategy
VIKTOR
Yes, that’s exactly the right kind of communication. Let me share another story. I have friends I respect greatly—niche experts who really know their field. After your trip for the screening, they told me: “Listen, Karnaukh is impressive.” They said you did an outstanding job there. I’m curious—what exactly did you do? Tell us more about the screening process, because it’s important. It’s our future, our cooperation for years to come. This is a dynamic we really need. What did your team do? I understand it was a big team effort—not just yours—but also your department’s and the Ministry of Finance’s.
LESIA
First of all, thank you for such a kind assessment. We really did work hard. We prepared for the screening procedure itself for over four months. It was meticulous work. We held three simulation sessions—essentially mini-screenings—each lasting two full days. We prepared presentations, discussed them, critiqued them. Why? So that, without unnecessary embellishment, we could give our partners and colleagues—fellow civil servants from the European Union—a full two-day picture of our legislation, procedures, and processes. How we work, what we do—when it comes to tax collection, setting taxes, and overseeing tax collection. And so they could compare this with how things are done in the EU and in their own countries, and so together we could develop a roadmap of recommendations that we will be obliged to implement as part of the negotiation process.
To be honest, I’m always self-critical. I don’t think I personally did anything extraordinary to deserve such high praise from an expert. It’s just that I’m not new to European integration—you know this. I began working on EU integration issues indirectly back in 2012, when this process was already underway. That’s when I first encountered EU directives and the process of incorporating them into national law. Later, I headed a department on European integration and was deeply involved in the process. I was fortunate at the time to have as my direct supervisor one of the founders of Ukraine’s Government Office for European Integration—a deputy minister who deeply understood the essence of the process. He was a great mentor, sharing knowledge and insights. So I understood where we were going, what we were doing, why we were doing it, and what we wanted to achieve.
It was also very encouraging that our colleagues from the European Commission’s Directorate-General for Taxation and Customs Union, as well as from the EU Delegation, were well-prepared and engaged. We had sent them, back in April, a full descriptive report and answers to all questionnaires. This was a partnership discussion—not a reporting session. It was about: Here’s our current state. We know these are our obligations. Here’s the path we plan to take to meet them. Here’s the timeframe. These are the resources we’ll need. And we communicated all this clearly, in straightforward dialogue.
Coming back to our broader approach to building a service-oriented tax agency—nothing works better than a simple, honest conversation. You can spin theories, look for hidden motives, talk about how “well-prepared” someone was—but when you simply explain what you do, how you do it, what you’ve achieved, what remains to be done, and how you’ll do it—people respond. They engage. They say: “We’ll give you more data; let’s discuss this too; we’ll bring in other partners.” And that’s it.
VIKTOR
Were there any difficult questions—ones that were uncomfortable or hard to answer?
LESIA
No, there weren’t. This is a standard working mechanism. Truly difficult questions usually come up in more political contexts. I’m, first and foremost, a civil servant. I focus on process, procedure, and results. Politics is different from public service. So the challenging questions are more often raised in European political institutions like the Parliamentary Assembly or the European Parliament—places designed for political debate.
VIKTOR
So the discussion during the screening was a partnership?
LESIA
Absolutely. It was entirely cooperative and professional. The questions from the experts were mainly to clarify points they didn’t fully understand. For example, in different EU countries, different databases are used to calculate property tax. In Ukraine, for land plots, it’s the State Land Cadastre. One question was: “Where do you get your data on land plots used as the basis for land tax assessment?”
VIKTOR
So that technical?
LESIA
Yes, very practical. I’m speaking about the administration side—because the Ministry of Finance presented its part on policy-making. They were asked about methods for calculating tax gaps, about changing approaches to VAT and excise duties. Our questions were all very practical: How do you interact with taxpayers via the electronic taxpayer portal? How many taxpayers do you have? In what format do they file returns? All of this we had covered in our presentations.
They also asked how ready we are to be part of the EU in terms of information exchange, since we are already party to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, aimed at preventing fraud and tax evasion worldwide. A simple example: we must promptly provide information about potential cases of tax evasion we discover, and they must do the same for us. Then—how do we exchange this information, and how do we process it? It was a very concrete, professional discussion.
VIKTOR
And of course, language skills help you communicate directly.
LESIA
If I may take a moment for a little “advertisement”: People, please learn languages. Language really does open many doors. When you can freely and calmly communicate with partners in their language and clearly express your thoughts, it helps enormously.
VIKTOR
Absolutely. Whether at official events or during coffee breaks, people can approach you and ask questions. And when they see that the head of an agency can speak comfortably and clearly, it shapes perceptions. It’s important.
LESIA
Exactly. During the screening, beyond the official dialogue, there were many informal conversations between sessions. Speaking fluent English allowed me to clarify many points that we hadn’t included in the presentation.
How the Head of the Tax Service Teaches Her Children Financial Literacy
VIKTOR
That’s really important—you expand your partners’ understanding, and it helps you communicate with them later when developing the institution. Given that you have three fantastic children, how does the head of the Tax Service teach financial literacy at home?
LESIA
Well, my children are at an age where they already know how to manage money. I taught them the basics of handling resources long before becoming head of the Tax Service. Wherever I’ve worked, I’ve always been genuinely interested in what I do—and I share that with my closest family. I’ve always been interested in how the state administration system works, and I’ve tried to explain it to them as early as possible. All the acronyms—SBU [Security Service of Ukraine], NABU [National Anti-Corruption Bureau], NACP [National Agency on Corruption Prevention], KOVA [Kyiv Regional Military Administration]—they’ve known since birth. And just as I grew up, as the daughter of lawyers, knowing the difference between an attorney and a prosecutor (I’m joking), my children grew up with a mother who’s a civil servant.
The key lesson I’ve always taught them is the value of money and resources. Here’s a simple example: I have two sons and one daughter. You often see stories online about children throwing tantrums in toy stores. Honestly, in my family that never happened. If we went to the supermarket for dairy products, my children loved yogurts. Luckily, our producers—and some imports—offer plenty of variety. My rule was: “Today, each of you can choose two yogurts—any kind you like—but only two. That’s within our budget.” They had freedom of choice, but within limits. Sometimes it was just one yogurt, because payday was tomorrow. Real-life situations. It taught them to plan. When they go to camp, we give them a set amount of money, and they plan their spending. That’s a system of planning and reporting.
I think this mindset extends beyond money—it’s about attitudes toward the state and its institutions. In our family, we all know the phrase: “The state begins with you.” For us, that’s not a slogan—it’s reality. You are part of the state. You can’t separate the citizen from the state. So we respect people, we respect work, and we respect public institutions. That’s how my family lives.
VIKTOR
I want to thank our defenders—men and women—for making it possible to breathe in a free country. This podcast could not have been produced without the support of the International Renaissance Foundation.
Lesia, thank you, and see you again on the podcast. I won’t let you off the hook that easily.
LESIA
Thank you, Viktor. We’ll be ready.
VIKTOR
Agreed. Thank you!
This text has been translated and adapted from the original Ukrainian version with the assistance of artificial intelligence. While every effort has been made to ensure accuracy and clarity, some nuances may differ from the original.