The tax caused the Ukrainian army to lose thousands of ground drones

Ihor Fedirko, CEO of the Ukrainian Defense Industry Council (UCDI), said the Ukrainian military plans to buy 25,000 unmanned ground equipment in the first half of 2026. If electric vehicles were not subject to a 20% value-added tax from January, they could afford to buy 5,000 more units.

“That is a huge number for the army,” he said.

UCDI is an industry association established in 2025 to represent and coordinate the activities of private defense manufacturers in Ukraine.

Fedirko said the new tariffs have thrown Ukraine’s domestic drone industry into chaos since the beginning of this year. Manufacturers have gone months without contracts, some large enterprises even nearly went bankrupt.

Nina Yuzhanina, a Ukrainian MP from the European Solidarity Party, said last week that the value-added tax (VAT) on electric vehicles had caused the supply of ground drones for soldiers in some areas to “almost stagnate”. Some politicians say the tax is stifling a vital industry that Ukraine is trying to expand.

Ukrainian lawmakers are urgently looking for ways to abolish VAT on ground drones. Ms. Yuzhanina and 44 lawmakers on May 19 introduced a bill to solve the core problem, which is that the country’s goods classification system is classifying ground drones with electric vehicles.

The new bill will define ground drones as separate goods, helping this equipment not be subject to 20% VAT. The bill will be discussed within the next two weeks, but MP Yuzhanina admitted that even if it is passed immediately, it will still take about two months for the impact to fully spread and restore production activities.

The Ukrainian Ministry of Defense plans to buy a total of 50,000 ground drones this year. Each device costs 5,000-100,000 USD depending on type and configuration. “Being tax exempt will help save about 200 million USD. This is a huge number for us,” Mr. Fedirko said.

During martial law, most products of the Ukrainian defense industry were not subject to tariffs. Electric vehicles have also been exempted from tax since 2018, but this only lasted for 7 years and expired on January 1.

Entering 2026, military procurement departments suddenly discovered the need to increase the budget for ground drones by 20%. They feel confused by the new process, as weapons and military equipment are exempt from VAT by default.

Drone manufacturers have not been able to sign any contracts with the state for 3 months, even though this is the lifeline of many large companies. “3 months without anyone buying is crazy. We cannot live without the contract,” UCDI leaders said.

Ukraine’s Ministry of Defense acknowledged the problem in April, saying it was quickly “troubleshooting” contracts and speeding up delivery. The agency also assured manufacturers that it will purchase 25,000 ground drones in the first half of 2026.

Meanwhile, many companies are struggling to find a way to survive. A 20% budget reduction could be a fatal blow to a cash-hungry industry. VAT also causes defense businesses to spend more weeks processing administrative procedures, due to having to contact tax authorities and declare the procurement process.

Mr. Fedirko said some companies may have had to reduce production by 30% compared to last year to maintain operations, as well as cut staff.

Some businesses have sought to classify ground drones as tanks or armored vehicles, while others sell products to volunteer organizations like Come Back Alive, which supplies equipment to the military through unofficial channels.

Tencore, the manufacturer of the widely used TerMIT ground drone, said it had to rely on volunteer organizations because it did not sign a contract with the state for 5 months. “For ground drone manufacturers, VAT is not simply an accounting issue,” a company representative said.

It took Ukraine nearly 6 months to start resolving the issue of imposing taxes on ground drones, because this is a very new device and makes it difficult for lawmakers to define. The European Union’s commodity regulations, which are the basis for Ukraine to build its domestic classification system, also do not have clear standards for ground drones.

Although drone procurement resumed in the spring, around March in Ukraine, manufacturers such as Tencore said the delay left soldiers on the front lines lacking necessary equipment.

“For Ukraine, 6 months seems like an eternity,” Mr. Fedirko said, seemingly referring to the time between when the VAT tax took effect and when lawmakers introduced a troubleshooting bill.

Ukraine’s Defense Ministry declined to comment on the bill, saying it was not allowed to influence the consideration or debate process. However, the agency announced that the number of domestic ground drone manufacturing companies has increased to more than 280, with 550 products being offered for sale.

The Ukrainian army is increasingly relying on ground drones to conduct frontline missions, including logistics, evacuations and attacks. President Volodymyr Zelensky said that in the first three months of the year alone, the Ukrainian military used ground drones to carry out more than 22,000 missions.

Ukrainian Defense Minister Mykhailo Fedorov also stated the goal of having “robotic systems” take on 100% of front-line logistics tasks.