Bulgaria's VAT Hike - the Least Evil?

Editorial |Author: Milena Hristova | April 20, 2010, Tuesday // 13:37|  views

The tax drama has returned to Bulgaria after decades of absence for what does not appear like a final round of resolution. The old demons around tax increases are having a small field day of their own, getting business and citizens on the verge of freaking out.

After a series of head-spinning changes in plans over the last few moths, Prime Minister Boyko Borisov and Finance Minister Simeon Djankov made it clear this week that the prospect of a hike in the value-added tax (VAT) rate, which now stands at 20%, is quite likely.

The justification? Shoring up the budget. While without a doubt the so-called luxury tax is nothing more than a purely populist measure, thanks to the VAT hike, the cabinet expects to collect an additional BGN 540 M of revenues by the end of the year, which accounts for one third of the sum, needed to patch up the budget gap. In view of this target, the measure does not seem to have an alternative, at least for the time being.

Why now? The government just understood that it has fallen off the wealthy wagon and needs a more realistic plan that suits the current situation. It has two options: either to cut the budget expenses or increase the revenues. It is not an easy choice. The scales have been tipped in favour of the second option as the first one met vehement opposition.

The same sorry fate however is likely to befall the VAT increase too. Politicians, analysts and trade unions have taken a firm stand against the hike, citing a long line of negative repercussions – an increase in the inflation rate, an expansion of the grey sector, a slow-down in the economic growth, in short a boost for the impact of the crisis.

Representatives from all business sectors have cautioned that the hike in the value-added tax in Bulgaria should be a last-ditch measure, introduced only together with an overhaul in government expenditure and structural reforms.

It is also still not clear whether the tourism sector will be affected by the measure. For years on end the sector has relied on a lower, 7% value-added-tax and it is only natural to expect that the hike will hit here as well.

Bulgaria has the lowest personal and corporate income tax in the EU at 10%, which was introduced at the beginning of 2008, replacing the previous system, which combined several different tax rates - between 20 and 24%, depending on income.

That's why it is only natural that the government chooses to keep the direct taxes unchanged as it strives to make Bulgaria competitive in the battle for the shrinking flow of foreign investments. The increase in the indirect taxes – excise duties and VAT - seems to be less painful.

The problem is not only that after coming into office, the new Bulgarian government announced it plans to cut VAT from the current 20% to 18% in 2010 and by a further 2% by the end of its term.

The problem is that no study has been conducted on the social implications that this increase will have on the vast majority of Bulgarians. Nor any thought has been given to the troubles that the cabinet will have to experience to collect VAT of over 20%.

The government has missed plenty of opportunities to cut expenses and now the price for this quick compensatory surgical measure has to be paid by everyone, threatening to zap the reserves of the business and the people.

The business may only start to think of ways how to save itself from getting sucked into the tornado of the government's messes and pray for VAT reimbursement. While the people may need to actually mourn the loss of a former lifestyle or make profound changes in the way they deal with money.

Even though the government says this will only be a temporary measure.

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Tags: VAT, value-added tax, Boyko Borisov, Prime Minister, anti-crisis measures, anti-crisis program


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