VAT vs. robots: How a single amendment put thousands of UGVs at risk
Five months.
That is approximately how long it took the state to realize and correct its own mistake, which cost it an unknown number of human lives, billions of hryvnias and thousands of pieces of robotic equipment that were not delivered on time.
Can a country at war invest huge sums in military technology while simultaneously undermining it through its own policies? We live in Ukraine, so you know the answer. This is exactly what happened recently in the field of unmanned ground vehicle. And this case serves as a prime example of how a 'state failure' is not merely an abstract statement of fact. It is the responsibility of specific institutions: the Cabinet of Ministers, the Verkhovna Rada, parliamentary committees, ministries, particular officials and bureaucratic processes. It is precisely institutional memory and well-established procedures that prevent us from wasting five months on fixing such mistakes.
UGV is the cyberpunk we deserve. Ground robots such as 'Stohid', 'Targhan' and 'Termit', along with their counterparts, take on the most dangerous tasks. They evacuate the wounded from their positions and deliver water, food and ammunition to the front line. In addition, robots are used for mine-laying, demining, reconnaissance, logistics, and sometimes even as kamikaze drones. In other words, they replace humans in places where it's better for humans not to be. We all agree that the most precious resource in this war is our people, don't we? Well, UGVs are one of the practical tools for conserving this resource. That is why their supply is not merely another procurement of equipment, but a matter of strategic national interest.
Ukrainian unmanned ground vehicles have come a long way—from garage-built prototypes to a point where, in the spring of 2026, the Ministry of Defense announced plans to procure 25,000 units for the Armed Forces in the first half of the year alone. That is twice as many as in the whole of 2025. It seemed that another Ukrainian defense-tech success story was unfolding right before our eyes. Something like the 'Army of Drones,' but on the ground. However, we live in Ukraine, so this story was never going to be simple.
On October 1, 2025, Draft Law No. 14097 was registered in the Ukrainian Parliament. Formally, it focused on special bank taxation for 2026. What could banks possibly have in common with ground robots, you might ask?
Well, hold on.
Then came the standard parliamentary procedure: expert reviews, amendments, committee hearings, and votes. Somewhere along the way, provisions regarding electric vehicles were added to cancel certain tax benefits for EVs. Essentially, the state wanted to collect more revenue on imported Teslas and Priuses. However, nobody considered that along with civilian EVs, unmanned ground vehicles and their components were partially hit by the same tax burden.
As a parliamentary bill, it didn't undergo a full government review by the Cabinet of Ministers. Standard legal and academic screeners also had a blind spot. They were never tasked with checking whether this tax revision could impact defense.
Then, in early December 2025, Parliament passed Law No. 4698-IX. On January 1, 2026, the new tax regime came into force. It quickly sent shockwaves through the entire defense-tech UGV sector. In short, a formal non-defense decision created a very real defense problem.
Here are a few numbers to put the scale of the problem into perspective.
The average price per NRC ordered via DOT-Chain Defense was 638,834 UAH. A plan to purchase 25,000 systems at this average price amounts to approximately 15.97 billion UAH. If 20 per cent VAT is levied on such a purchase, the state has two options.
The first is to find an additional approximately 3.19 billion UAH to purchase those same 25,000 robots.
The second option is failing to find the money and buying fewer robots instead. That's roughly 16.7% cut, meaning that instead of 25,000 UGVs, the military gets about 20,833. That is a shortfall of over 4,000 robotic platforms. You can only imagine what the soldiers think of such a cut—on top of carrying 20 kilograms of their own armor and ammo, they will have to haul hundreds of extra kilograms to frontline positions on their own backs instead of relying on a robot.
For manufacturers, the situation didn't look too good either. Some contracts may have been concluded at a fixed final price. In other words, the manufacturer had already agreed on the price, calculated the cost price, factored in a margin and committed to delivery deadlines. And suddenly, a change in the tax regime partially or completely erodes their margin. Not only does this deprive the manufacturer of the profit from which they pay salaries, taxes and so on – it also means that the manufacturer's well-established supply chain goes to waste, posing a risk of delivery delays. I don't think I need to explain what delivery delays mean in wartime. But let me clarify something else. Profit margins on military products are fixed even without any additional tax surprises and stand at 25 %. Due to the VAT situation, some manufacturers of UGV have found themselves in a position where, after months of work, the company breaks even, if not making a loss. This is money that could have been used to purchase essential components, fund R&D, scale up operations, cover companies' running costs, or simply pay salaries. As a result, some manufacturers have simply started turning down contracts, which potentially threatens to increase the cost of products for the end customer, namely the army.
Journalist Yulia Kirienko-Merinova was among the first to sound the alarm. She outlined the situation and its potential consequences for the frontline. Thanks to her article, the Ministry of Defence Civil Anti-corruption Council paid attention to the issue and immediately got to work. We held a series of formal and informal meetings with the Deputy Ministers of Defence and representatives of Parliament. After that, as representatives of civil society, we tried to draw attention to the problem, highlight its scale and, together with the very people who had made these mistakes, find a way to correct them.
Our participation in the relevant working groups and a series of letters we sent enabled us, together with other stakeholders, to escalate the situation regarding the UGV as quickly as possible. By the way, behind closed doors, some people's representatives referred to these Tax Code amendments as a 'time bomb.' It was allegedly planted back when the bill was drafted amid the arrival of a new Minister of Defense—who, incidentally, had a public conflict with the head of the tax committee. I do not know for certain whether the relevant tax committee and its Chair had the opportunity to see that the relevant Ukrainian Classification of Goods for Foreign Economic Activity (UCGFEA) code covers not only civilian equipment but also electric motors for unmanned ground vehicle. Logically, access to customs declarations and goods transported under the relevant codes is not confidential information, and it is not difficult to verify this when preparing the relevant amendments. In any case, I hope that this was merely a coincidental oversight or negligence, rather than evil intent.
It is also worth noting that the entry into force of the Tax Code amendments coincided with a period of major leadership changes within the Ministry of Defense, ranging from the appointment of a new Minister to reshuffles among department heads and deputy ministers. While it is impossible to isolate the impact of these personnel changes, they are likely to affect the speed of decision-making. As a result, resolving the issue took five months instead of being addressed promptly after the legislative flaw was identified and publicly brought to attention.
The issue was ultimately addressed only in May 2026, when a bill was introduced to exempt the supply of unmanned ground vehicles for defense purposes from VAT. By the end of May, Parliament had adopted the amendments, and the exemption took effect in June. In the end, the sequence of events was straightforward: the government created the problem, spent several months dealing with its consequences, and then had to correct it under time pressure. It is certainly positive that the mistake was eventually fixed. What is less reassuring is that it had to be fixed in the first place.
Even after a relatively happy ending, experts from the Ministry of Defence Civil Anti-corruption Council analyzed the case as a post-mortem, treating it as a symptom of a broader issue: the state lacks a reliable early-warning mechanism for decisions that might accidentally hit defense procurement. We broke down what went wrong, why the risk was missing early on, which institutions should have spotted it, and what needs to change now to prevent this from happening to other defense technologies. In doing so, we identified a series of systemic flaws.
The first issue lies in the legislation itself. In a country at war, any change to tax, customs, or regulatory rules affecting dual-use or defense goods must undergo a defense impact assessment. What is needed is a brief, official defense-oriented screening that yields an expert conclusion in the explanatory note on whether the change affects the military. In the case of UGVs, this question was either never asked or asked far too late.
It is crucial to understand that in wartime, a bill may formally focus on taxes, banking, customs, energy, or general regulation. However, if its provisions affect components, transport, electronics, batteries, radio modules, optics, or software, it automatically touches upon national defense. If the explanatory note highlights a potential defense impact, the relevant Committee on National Security, Defense, and Intelligence would be alerted to it before any vote takes place.
The second issue is similar to the first, but comes with its own nuances—let's call it weak risk monitoring. Ideally, the Ministry of Defense should foresee such situations, but it simply lacks the capacity to track every single amendment across various codes and laws. Theoretically, almost any economic policy can impact defense—from lithium supply chains to draft exemptions for PE teachers. However, the Ministry of Defense must have a working mechanism to receive market signals—especially from defense manufacturers, who are the first to notice when a new rule hits production costs, profit margins, or delivery schedules. Currently, no such 'single window' exists. Manufacturers don't know who to call or write to with warnings, nor who has the authority to take their issue and escalate it to the Cabinet of Ministry, the relevant parliamentary committee, or procurement agencies.
We identified the third issue right within defense contracts. Currently, there is no clear, automatic price-adjustment mechanism in the event of a change in tax law. When the state alters VAT rules, it shouldn't trigger an individual crisis for every existing contract. Tax adjustments should be governed by an agreed contractual formula. We don't mean a generic clause like 'prices may be adjusted as provided by law,' but a concrete procedure specifying exactly what happens if the VAT rate changes, a tax exemption is revised, or the tax status of a specific product category shifts.
In this case, responsibility lies with every party involved in the process. Parliament did not give sufficient consideration to the consequences of the tax changes for the defence sector. The government lacked an effective safeguard against parliamentary initiatives that indirectly affect the armed forces. The Ministry of Defence lacked a clear channel for receiving and promptly processing feedback from manufacturers. As for the business sector itself, it was either unable or too late to communicate the problem in a timely manner using figures and clear arguments.
Based on the analysis of this case, the Ministry of Defence Civil Anti-corruption Council has drawn up several specific proposals.
Firstly, during a period of martial law, a mandatory assessment of the impact of draft legislation on the defence sector should be introduced. If a draft bill alters the tax, customs, budgetary or regulatory conditions for goods that could potentially be defence-related or dual-use, this must be explicitly stated in the explanatory memorandum. If the impact is, or could be, significant, the draft bill must be referred to the Defence Committee for consideration prior to a vote.
Secondly, the Ministry of Defence should establish a permanent mechanism for monitoring legislative initiatives that could potentially affect defence procurement.
Thirdly, a 'one-stop shop' for defence manufacturers should be set up within the Ministry of Defence. This could take the form of a military ombudsman for manufacturers or another institutional body, whose role would be to receive feedback from manufacturers, record it, filter out the noise, quantify the problem and quickly escalate it to those in a position to make decisions.
Fourthly. Standard defence contracts must provide for a clear mechanism for price adjustment in the event of a change in the tax regime.
Fifth. For critical defence technologies, the state must maintain a separate register of tax and customs risks. If a particular category depends on Ukrainian Classification of Goods for Foreign Economic Activity (UCGFEA) codes, imported components, tax concessions or special regimes, this must be apparent before large-scale procurement begins, rather than after contracts start to run into difficulties.
The VAT story on the UGV ended relatively well. But only relatively, because it is impossible to estimate how many lives, positions and limbs were lost during those five months, while they were rectifying something that could have been avoided. Will anyone be held accountable for the consequences of this mistake? That remains to be seen. And I would like to emphasize once again: war does not forgive systemic errors. Today it was components for ground robots; tomorrow it could be batteries, optics or software. The state must have a mechanism not only for identifying errors, but also for correcting them quickly.