Budget revenues would rise by 0.2 percent of gross domestic product (GDP) for every point of VAT increase, according to calculations by the Ministry of Public Finance for the 2010 budget. Thus, raising VAT to 21 percent would generate higher revenues by some €0.5 billion. Minister of Finance Gheorghe Pogea said that a possible increase in VAT is being considered, given that the government may apply a revenue reform for 2010, in order to raise the level of contributions to the state budget, but which would allow maintaining the flat tax, the profit tax, and the income tax, with a decision regarding VAT depending on the sustainability of the budget deficit.
“We can even consider a reform of revenues, because Romania has one of the lowest levels of public revenues of GDP, of some 31.8 percent, unlike all neighbouring countries, where this amounts to almost 40 percent,” Pogea said.
On the other hand, State Secretary Gheorghe Gherghina told Business Standard that next year’s budget is drafted based on a 16 percent flat tax, and 19 percent VAT. “Any increase in the value-added tax will be a political decision,” Gherghina said.
Last week, a report by the Economist Intelligence Unit, the analysis division of The Economist, said that an increase in VAT and the flat tax in 2010 “seems inevitable” for Romania to meet the budget deficit target agreed upon with the International Monetary Fund. “It seems inevitable that the government will be forced to raise VAT or the income tax to meet these targets, in spite of the negative impact that this measure will have on consumer expenses,” the EIU report indicated.
Limiting the calculation base for social contributions at RON 6,000, raising the minimum salary in the private sector, and eliminating accounting optimizations by which someone can avoid paying income taxes are some of the proposals made by tax advisors interviewed by Business Standard, as options to the VAT increase planned for next year.
According to advisor Gabriel Biriş, before deciding to raise VAT or the income tax, any responsible government should take two measures: expandthe taxation base and reduce tax evasion. A short-term solution could be limiting the calculation base at a reasonable level of RON 6,000. According to Biriş, additional revenues to the consolidated budget through the application of this measure are similar to those brought by a three percent increase in VAT.
