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ANALYSTS SAY MEASURES TO REDUCE SPENDING MUST COME HAND-IN-HAND WITH LOWER TAXIS

Coalition sets income tax and VAT at 19 percent

THE RULING coalition agreed on May 27 to set income tax and value-added tax (VAT) at a flat rate of 19 percent, 1 percent lower than the rate suggested in the Finance Ministry's original tax reform proposals.
Although agreed by all four ruling parties, the rate must still be approved by parliament, scheduled to debate the tax reforms at the end of May.
Finance Minister Ivan Mikloš reacted to the setback of his plans by warning that the public finance deficit for 2004 could rise to as high as 3.9 percent from the projected 3.4 percent of GDP.

THE RULING coalition agreed on May 27 to set income tax and value-added tax (VAT) at a flat rate of 19 percent, 1 percent lower than the rate suggested in the Finance Ministry's original tax reform proposals.

Although agreed by all four ruling parties, the rate must still be approved by parliament, scheduled to debate the tax reforms at the end of May.

Finance Minister Ivan Mikloš reacted to the setback of his plans by warning that the public finance deficit for 2004 could rise to as high as 3.9 percent from the projected 3.4 percent of GDP.

At the session in Častá-Papiernička near Bratislava, coalition party leaders agreed that non-sparkling wines would not be taxed at all, although the Finance Ministry had proposed a tax of Sk25 (€0.61) per litre.

The planned average increase of tax on beer to Sk1,000 (€24.27) per hectolitre was reduced to Sk500 (€12.13), compared to the current Sk300 (€7.28) per hectolitre. This will raise the price of a half-liter of beer by about Sk1 (€0.02), compared to the Sk3.7-Sk4.5 (€0.09-€0.11) hike originally proposed by the ministry.

However, these reductions will be offset by increased taxes on mineral oils and fuels. The Finance Ministry had proposed an increase of Sk1 to Sk2.5 (€0.02 to €0.06) per litre on particular fuels, but the new tax rates will be higher by Sk1.

This is in line with similar plans in the European Union, which is preparing an increase of the current minimum taxes on these goods.

The Finance Ministry's plans to increase tax on cigarettes by Sk9 (€0.22) per packet were not changed in Častá-Papiernička. Confirmation of the hikes created high demand in tobacconists throughout the country, with some shops in Bratislava reporting they limited the number of cartons their customers could buy as stocks began to run low.

Slovak analysts reacted positively to the tax reforms, with Ján Tóth from ING Bank declaring that "through these tax reforms Slovakia can attempt to become the 'tiger' economy of central Europe".

However, Všeobecná úverová banka (VÚB) economist Vladimír Zlacký said he believed the government could have gone even further.

"In my opinion, the politicians should be more courageous in the reduction of the direct tax burden. I think direct tax of between 15 and 16 percent would be optimal," Zlacký told the TASR news agency, adding that Slovakia had wasted the opportunity to have the lowest taxes in the central European region.

"If Slovakia had the lowest direct taxes in central European region, it would become a regional tax paradise. It is possible that many firms would decide to move to Slovakia, which would significantly increase future tax revenues," he said.

Other analysts agreed the unified tax rate could add to Slovakia's attractiveness to foreign investors, but warned that further steps should be taken to ensure the country's economic health.

"This step alone will not resolve the problem of lasting fiscal imbalance, or the problem that too much is being allocated through the state budget. Therefore, the cabinet should also consider reducing expenditures along with this move," said Slávia Capital analyst Pavol Ondriska.

Ondriska warned that higher tax rates for fuels would increase the expenses of many producers and service providers, creating inflationary pressures.

For instance, public transport companies might consider raising prices again, or demanding subsidies from the state budget, Ondriska said.

In the first six months of the changes, the higher taxes should bring Sk3.7 billion (€90 million) to the state budget, which will compensate for lower collection of other taxes - chiefly VAT and corporate tax - in the first months of this year.

- From press reports

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