Is Bulgaria heading towards reduction of value added tax?

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The currency board with the Bulgarian national currency being pegged to the Euro, the flat income tax amounting to 10% and the 20% value added tax are among the main pillars of the Bulgarian economy. There are hardly any economists and financial experts who are questioning these three macroeconomic pillars. But suddenly, many political parties started to talk about the need to reduce the rate of the value added tax in this country.

In Bulgaria the VAT is set at 20% for all goods and services, except for tourism, where a 9% VAT was introduced. In France for instance, there are five different VAT rates. The topic related to possible reduction of VAT rate for some essentials and medicines was widely discussed in the past as well. However, the authorities and the reputable financial experts have always rejected such ideas with the arguments that the introduction of differentiated taxation would impede tax collection and that a reduction of the VAT rates does not mean that the prices for the end consumers will go down.

Now, however, things look much more serious than the general propaganda calls of the past that the VAT rate for some items should be reduced. The opposition parties represented at the Bulgarian National Assembly – the Movement for Rights and Freedoms and the Bulgarian Socialist Party started to talk about this move first. One week ago Bulgaria’s Premier Boyko Borissov promised to the large business that the government will not change its tax policy. However, Borissov also hinted reluctantly that the value added tax for books may be reduced, as demanded by the opposition. Bulgaria’s Minister of Finance Vladislav Goranov was skeptical about the effect on the prices for the end customers from a possible reduction of the VAT levied on books. However, he did not mention anything about possible reduction of the revenues to the state budget, simply because the revenues from taxes levied on the book market are so insignificant, that a possible reduction of the revenues stemming from a lower VAT on books will practically have no negative effect on the state treasury. The influential chairperson of the National Assembly Budget and Finance Committee Menda Stoyanova, however, warned that the reduction of the VAT must be compensated with increase of other taxes.

In the autumn of 2019 local elections will be held in Bulgaria. The people pin more hopes on these elections as compared to the latest European Parliament elections, because in this case we are talking about real power and an opportunity for revenge against the ruling GERB party which won the latest EU elections. The promises for reduction of prices of essentials is a strong argument used by the political forces to attract supporters and the Movement for Rights and Freedoms and the Bulgarian Socialist Party are offering such financial measures – to reduce VAT on essentials such as meat, dairy products, flour, pasta, bread, medicines, etc. It is still not clear how much the value added tax will be reduced, but these measures are not likely to result in lower prices for end consumers and the reduction of VAT in other countries proved that. However, the supporters of BSP and MRF, who are not among the wealthiest citizens, are happy with this idea.

Experts from the Institute for Market Economics contend that this is a very toxic populism and warn that such experiments will only destabilize this country’s economy and finance, although almost all EU countries already introduced differentiated VAT rates. Each country has to analyze its social and economic priorities and chose the sectors where VAT can be reduced or increased. So far no detailed analyses in this direction have been made in Bulgaria and any sharp political maneuvers with the VAT policy are risky, because 60% of all revenues in the state treasury are formed by value added tax.

English version: Kostadin Atanasov

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