News 16 Jul 14

Romania Raises Indirect Taxes to Fill Budget Gaps

The centre-left government is proposing hikes in indirect taxation to cover a likely budget deficit created by reductions in the levies on employers.

Marian Chiriac
Bucharest

Romania's government is proposing controversial increases in some taxes after deciding to cut taxes on employers in order to boost job creation.

The cabinet on Wednesday is to start debating a draft Fiscal Code that includes increasing taxes on cars and owners of non-residential properties among other things.

The tax on cars with engines below 1,600 cbm will go up by around 250 per cent, according to reports. The tax on owners of non-residential buildings will rise from 0.1 per cent to 0.25-1.5 per cent of the building’s value (or 2 per cent if there is no valuation), which is close to what companies have to pay.

The Fiscal Code also empowers local authorities to raise their own direct taxes by up to 50 per cent in 2015, depending on “area specific conditions”.

Under current regulation, local taxes are adjusted depending on the inflation rate once every three years through an Emergency Government Ordinance, and local authorities may not exceed the amount by more than 20 per cent of the figure set by the government.

The Ministry of Finance hopes that the changes will stimulate economic growth and limit the overall increase in the tax burden.

“One of the government’s priorities is to limit tax evasion, including through changes in the Fiscal Code and Fiscal Procedure Code. That’s why we want an open and transparent public debate on the changes,” the Ministry of Finance said.

The new codes are set to be debated together with next year’s budget in parliament.

Analysts say the planned rise in taxes will probably not do much to help the economy long term - but will help the government to cover an immediate budget deficit.

“The planned changes in the Fiscal Code are just an attempt to bring some more money into the budget following the law cutting the tax paid by employers for social security,” economic analyst Lucian Isar said.

The law, which parliament adopted earlier this month, proposes cutting the social security tax paid by employers by 5 per cent starting from October. It will deprive the budget of about 5.5 billion lei (1.25 billion euro) a year, which is why the IMF has been sceptical about its value.

While Prime Minister Victor Ponta says the cut to the tax, known as the CAS, will boost jobs and business in general, President Traian Basescu has refused to sign it off until the government says how it is going to make up the shortfall.

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