New VAT Act to be introduced in 2006
THE Cabinet is preparing to table in Parliament for approval in mid-May a series of changes to tax laws that would substantially reorganise the entire taxation system in Bulgaria.
On his return from a visit to Washington on April 20, Finance Minister Milen Velchev said he hoped that the new taxation laws would be adopted, because this was one of the conditions set by the board of the International Monetary Fund (IMF) to approve the first review of the agreement with Bulgaria.
Finance Ministry officials said that the new laws are required in connection with the launch of the National Revenue Agency from January 1, 2006.
At a public discussion on the proposed new laws, some representatives of business said that it was “extremely insolent” of the Government to make tax changes just a short while before it was due to leave office. However, it appears that many businesses are in favour of the changes, because they would benefit entrepreneurial activity.
The draft changes to the Personal Income Taxation Act set April 15 as the new deadline for submitting tax returns and paying taxes due. Currently, tax returns must be filed by April 15 and paid by May 15.
Tax-exempt minimum income is envisaged to rise to 140 leva a month, from a current 130 leva. The amount of voluntary pension, health and life insurance that may be deducted from taxable income will be 600 leva a year. Currently it is 10 per cent of income.
In a further set of changes, parents with two children will be granted the right to declare a monthly taxable income lower by 65 leva. This sum will be tax-exempt.
Annual taxable income of families with one child would be lowered by 360 leva; of families with two children by 780 leva and of families with three children, by 1140 leva.
A cut in profit tax would bring it from its current 15 per cent to 12 per cent, according to the proposals being considered by the Finance Ministry. The governing majority believes that this would lure new investors to Bulgaria because it would also increase the potential for reinvesting profits.
The Finance Ministry is also considering a cut in value added tax (VAT) to 18 per cent in 2007. Currently, the VAT rate is 20 per cent.
The change is envisaged in an entirely new VAT Act, drafted to harmonise Bulgarian legislation with that of the European Union. The new act is to come into effect from 2006.
Until the end of 2006, tourism services for foreigners will be charged VAT at a rate of seven per cent. After January 1, 2007, the services of lawyers and notaries will become taxable, which is expected to lead to a considerable increase in fees.
Textbooks supplies for schools and universities will be tax exempt until 2007 and will then be charged VAT. The same applies to tickets for sports events, state-funded museums, galleries and libraries. The zero tax rate for cars for the disabled will also be revoked.
The draft also envisages group registration of two or more persons for taxation purposes when they are closely related. Voluntary VAT registration will be introduced regardless of the taxable turnover.
Excise duties will not be left unchanged either, as Bulgaria has to stick to the rules introduced by the EU in this regard. This means that excise duties will have to rise gradually to reach EU levels when Bulgaria joins in 2007.
On April 19, Parliament approved the first reading of revisions to the Excise Duty Act, providing for restoration of the excise duty rates on Bulgarian and imported cigarettes to their 2004 level. Proponents of the measure said that excise rates effective in 2004 had to be restored in order to protect local producers of cigarettes.
The excise duties introduced as from January 1, 2005, led to an increase in prices of locally produced cigarettes of a lower class and to a decrease in the prices of certain brands of imported cigarettes.
MPs also approved the first reading of a completely new Excise Duty Bill. The bill defines “energy products” as a new group of excisable goods that, in addition to fuels on which excise duty was charged so far, includes natural gas and other goods. The bill regards such excise duties as having been in effect since January 1, 2005.
The draft proposes differentiated rates for energy products that will be used as heating fuel, for household use or for agriculture and forestry, horticulture, fisheries, stationary motors and off-road means of transport. The proposed rate is 50 leva for 1000 litres for gas oil and for kerosene. A zero rate is proposed for liquefied petroleum gas for heating and household uses and for natural gas.
In regard to the control of the application of differentiated rates, the bill imposes an obligation to mark liquid fuels on which lower excise duties are charged.
The new act retains the system of refunding paid excise duty upon production of foodstuffs and medicinal drugs. There is a possibility to recover paid excise duty on alcohol and alcoholic beverages used for medical purposes at medical-treatment facilities and pharmacies, for analysis samples needed for production tests, or for scientific research purposes.
The draft proposes mandatory registration of the rakia distillation points, which are termed “specialised small distillation facilities”, and “small wine-making facilities”. According to the EU requirements, the standard excise duty applies to the beverages produced at small distillation facilities with an annual output exceeding 10 hectolitres.
The Bulgarian Government has reached agreement with the European Commission that the quantities produced at such facilities be taxed at 50 per cent of the standard rate. In 2006, the rakia for family consumption produced at such facilities will be taxed at a zero rate.