Romania planning VAT stimuli for growth

10 August 2012

In July 2010, Romania raised its standard rate of VAT by five percentage points from 19% to 24%.  There was resistance to the move from all quarters, but it had been made under IMF conditions, linked to a $20 billion support package.  It was one of the measures in a jointly agreed plan with the IMF so that Romania could hit its budget deficit targets.  Opinion in Romania held that the VAT hike would have a negative consumer demand effect, particularly when coupled with 25% cuts in public sector remuneration.

The VAT uplift was particularly significant because, unlike other EU countries, there are very few products subject to reduced or super-reduced VAT rates.  Food, even basics such as bread and dairy products are standard-rated at 24%. 

Recent news indicates Romania is aiming to bolster consumer demand in a number of ways.  Upping public sector investment in infrastructure projects would be one driver, but in addition, Romanian VAT changes are being proposed for the 2013 budget.  Victor Ponta, Romania’s PM, announced at the end of July,  a possible cut in VAT rate on major agricultural and food products from 24% to 9%.    Nevertheless, agreement would require to be obtained from the EU and IMF for this move to take place. This may prove to be difficult if improvement in economic indicators is not apparent.  The EC has already formally listed concerns in relation to Romania’s position.

Some commentators in Romania argue that a food VAT cut would actually increase tax revenue on the basis that tax evasion would reduce, and second, additional disposable income would prompt consumer demand.

Intent to stimulate growth in Romania’s very large small business sector is also evident.   Following a formal 2011 request to Brussels, the EC issued a derogation decision on 26 March permitting an increase in the Romanian VAT exempt threshold from €35k to €65k for resident businesses.  Further, as part of the draft budget proposals, in order to assist small company cash flow and reduce tax avoidance, a VAT cash-accounting scheme has been proposed for enterprises with revenues less than €500k per annum.

 

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