Gov't sticks to 20% VAT plan

Banking

On Tuesday, the Finance Ministry announced the government was ready to accept a proposal to raise the top value added tax rate to 23% from 20% and the middle rate to 17% from 15%. The middle rate, however, will be increased to 20% from 15%, as it was planned in the fiscal adjustment package unveiled by Prime Minister Ferenc Gyurcsány on 10 June. "The liberals said this does not fit with their programme and Socialists decided to support their coalition partners," Spokesman Zoltán J. Gál said. Modifying the VAT plans so soon after unveiling them “could hurt investor confidence in short run,” István Zsoldos of Goldman Sachs commented on Tuesday. “The fiscal tightening plan already looked like an improvisation, and changing it so soon would raise doubts about how stable the other elements are going to be," he added. Ivailo Vesselinov of DrKW in London said yesterday's announcement was unlikely to have a marked impact on investor sentiment in the short term, but noted that “by changing its original plans so soon after they were announced the government has only strengthened the perception that itsfiscal package was prepared hurriedly and not finalised properly." Value added tax revenues are the single biggest tax revenue item in the state budget, yielding total revenues of close to HUF 2,000 billion annually. Raising the 15% rate by one percentage point brings around HUF 35 billion of extra revenues annually, while raising the 20% rate by one percentage point yields HUF 45 billion, according to government calculations. Some doubt these amounts, as raising only the 15% rate would mean higher costs for households, therefore people may reduce their spending and that would produce lower extra revenues than the previous idea of increasing both rates 2% and 3%. (Bloomberg, Portfolio)

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