[size=75:2fejxsyr]novinite 12 January 2010

Gradual VAT Reduction Draws Mixed Responses in Bulgaria

A day after Bulgaria's prime minister announced that Value-Added Tax (VAT), which currently stands at 20%, could be cut gradually starting from 2010, experts have voiced cautious forecasts.

Lachezar Bogdanov from Bulgarian economic think-tank Industry Watch said the reduction of VAT to 19.5% this summer will be possible only if the government cuts by 12% the public administration or by 25% the investment expenses.

According to Bogdanov the government should first proceed with a reduction of the social securities, since VAT brings to the budget more than half of all tax revenues.

“Generally it is a good idea to start VAT reduction, but in my opinion the measure should be implemented next year, not in 2010, “ commented Bulgarian Industrial Association (BIA) Chairman, Bozhidar Danev.

Analysts have warned that the gradual VAT reduction, starting from 2010, may call for an update of the budget for this year.

“I welcome the idea, but fear that it has not been considered carefully enough,” Gancho Ganchev, head of the Managing Board of the University of National and World Economy, commented. “The decrease of VAT by 5% every six months will lead to a reduction in the revenues, which is quite risky.”

The idea for reducing Value-Added Tax (VAT) in Bulgaria from its current 20 % rate by the end of 2010 was announced after Prime Minister Borisov's meeting with Israeli counterpart Benjamin Netanyahu, who made this recommendation as a measure to fight the financial crisis.

Borissov had previously said that he planned to bring down VAT to 17% in 2011.

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.

After coming into office, the new Bulgarian government announced it plans to keep unchanged the flat income tax rate and cut the Value-Added Tax (VAT) from the current 20% to 18% in 2010 and by a further 2% by the end of the term of office of Prime Minister Boyko Borissov’s administration.

The country will apply in January this year to join the exchange-rate mechanism, the two-year currency stability test prior to euro adoption, and seek to switch to the common currency by 2013.