THE introduction of the 20 per cent value added tax (VAT) on tourist services in Bulgaria is a serious threat to the sector’s further development, experts warn.

Currently, Bulgaria charges only seven per cent VAT on tourist services. However, in line with its commitments to the European Union (EU), the country will have to raise the rate to 20 per cent, which is the uniform rate for all goods and services in Bulgaria.

The scrapping of the current alleviation for tourism, designed to boost this type of activity, which is a priority for the country’s economy, would see Bulgaria with the highest VAT on tourist services, said Blagoi Ragin, chairman of the Bulgaria Hotel and Restaurant Association. In his view, this tax burden will make it hard for the country to counter the competitive pressure with other markets such as Greece, Turkey and Spain.

The highest VAT charged on tourist services in the EU currently can be found in Italy and Austria, but even these countries it is much lower, at only 10 per cent. Bulgaria’s direct competitors, like Spain and Greece, levy seven and eight percent VAT, respectively. Cyprus and Latvia enjoy the lowest VAT in tourism - only five per cent.

It is true that the EU requires that member countries should levy no less than 15 per cent VAT. However, the union allows alleviations for quite a large list of goods and services. In many countries in the EU, house repairs, clothes, bicycles, window cleaning, hair-dressing, care for children and the sick, and others, are taxed with symbolic rates of VAT.

Lower rates are also levied on sectors such as tourism, which are of serious importance for any national economy, as well as on socially-significant services and goods. There is a trend for the gradual removal of preferential VAT taxation in the EU, but this process will speed up after 2010.

“We will launch a large-scale campaign to defend the preservation of the seven-per-cent rate for our sector,” Ragin said.

The tax strike on tourism is envisaged in the new VAT Bill, which has been prepared by the Finance Ministry, and has already been criticised on many other points and from other business representatives.

For the past three years, the tourism industry in Bulgaria has developed vary rapidly, becoming a leading sector in terms of revenues. Preliminary figures showed that 2005 international tourism revenues (excluding transport) were about two billion euro, an increase of about nine per cent on the previous year.

Furthermore, the provision of tourism services is directly related to the increasing demand for workforce and, indirectly, to the reduction of unemployment in a series of sectors.

A raise in the VAT rate for hotels for example, will inevitably increase prices by more than 13 per cent, which will discourage customers. About 80 per cent of foreign visitors come to Bulgaria through foreign tour operators and their packages of hotel, food and other services currently include seven per cent VAT.

If prices increase by 13 per cent next season, hotels will face quite serious problems. Their sales will slump or expenses will surge. In both cases, hotels may be forced to stop operating, as they will be unable to cover their costs and repay investment.