VAT in Bulgaria could shrink to 15%

MANAGER Magazine in Bulgaria has recently published an interview with  George Kadiev who is an expert in Financial markets and macroeconomics. He is a former vice-minister of finance and currently the owner  of the CEEMarketWatch forecast and analysis Agency, which observes emerging markets in Central an East Europe. Here is a part of this interview:

- Mr. Kadiev , is the revenue from VAT overestimated or underestimated this year?

- It was greatly underestimated in 2007, especially the part that had to be collected by the National Revenue Agency (NRA)  from transactions within Bulgaria and Intra-community Acquisitions (imports from the EU). At that time the plans plan for the Customs Agency was such that it had to collect more than the NRA, even though the Customs only collect VAT for third country imports.Given the fact that 58% of bulgarian imports come from EUcountries, it makes sense that the main collection burden should fall on the NRA. Instead, the plan for the custom agency was to collect 3,5 billion for the NRA. Back then we disagreed with the minister of Finance. In 2008, the plan is more sensible-4,2 billion leva for the NRA and for billion for the customs Agency, even though I would say an even larger portion should be collected by NRA. The problem with NRA had always been with internal Bulgarian transactions, but now there are also problems with Inntra-Community deliveries. The reserves there are large, but a significant improvement in NRA activity is necessary - training staff, increasing motivation and improving the quality of revisions;and ofcourse, in view of criminal involvement in VAT fraud, better coordination with the Ministry of Interior, National Agency for Security and the Prosecutor's office is necessary. 

- Are you personally a fan of VAT reduction? 

- At the moment it is more sensible to do just the opposite - increase the VAT rate. Forcing greater fiscal discipline which the IMF keeps recommending every year, has no significant effect on limiting  the current dificit. For this reason it seems to me that sooner or later  some financial Minister  will be forced to take this unpopular measure.

-  How would an eventual reduction of VAT  reflect on business?

- I can only guess. A 2% reduction , for example probably would not lead to a reduction in prices, and yet the country will loose 800 million leva. For comparison , I will give you an example with the excise duty on coffee - since 1 of January 2008, there has been no such duty but coffee did not get cheaper; only the producers' and importers' profits increased and the country lost about 20 million leva in revenue. For that reason I am not a big fan of a small reduction of VAT, by 1,2 % and a large reduction is an unreasonable risk. 

- How do you view the differentiated reduction of VAT ? For which sectors would it be fair to reduce the tax?

- In principle I am no a fan of differentiated reductions, it makes collection more complicated and creates conditions for tax fraud. If for example you were to reduce VAT on children' shoes, is size 36 for children or is it for women? In the UK 90% of tax related law suits are controversies on which VAT to apply. I don't want to reach that point. Indeed most countries have differentiated VAT. Romania did it for some type of food. In Bulgaria we have already reduced the rates for tourism. I would prefer that we avoid new preferential rates in the future. The country has other methods of stimulating  certain categories of the population.