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Friday, January 07, 2005

IMF Proposes VAT And Excise Increases

The mission of the International Monetary Fund, which is expected in Bucharest on January 26, will propose that the government increase value added tax and speed up the programme of aligning with European Union excise levels.

The IMF sees this as the only alternative available to compensate for the loss of revenue caused by introduction of the flat tax and as the way to prevent an outburst of inflationary pressure.

IMF believes the fiscal lever is very important for keeping inflation under control, given that the central bank will be forced to continue reducing interest rates to discourage speculative flows after the upcoming deregulation of the capital account.

The IMF believes that an adjustment to the budget deficit will be necessary even below the 1.5% of GDP level planned for in the spending and revenue plan of the last government.

The safe options for covering the void in budget revenues caused by the reduction of income and profit taxes, for the first part of the year at least, are a VAT increase by at least one percentage point to 20% and increasing excises on March 1 instead of July 1 as initially planned.

Commenting on the introduction of the flat income tax, the IMF official said it needs to be done as "cleanly" as possible by cutting deductions and tax exemptions down to a minimum and attracting as much revenue for taxation as possible.

To alleviate the loss of budgetary revenues the government has chosen an increase in microenterprise income tax from 1.5% to 3%, an increase in dividend tax from 5% to 10% for individuals, and has given up plans to reduce social security contributions from 49.5% to 47.5%.

Posted by Iulia Rasoiu : 1/07/2005 11:14:00 am