Romania’s Government plans to reduce the value added tax (VAT) from 24% to 20%, starting January 1, 2016. The Executive also wants to cut the VAT on meat, fish, vegetables and fruits from 24% to 9%. The changes are part of the new Fiscal Code project, presented by the Government on Wednesday, February 18.

A second VAT cut, from 20% to 18% should be implemented in January 2018, according to the Government’s project to reduce taxation in Romania.

The VAT level in Romania is currently 24%, the fifth highest in the European Union, after those in Hungary, Denmark, Croatia and Sweden. The Average VAT in the EU is 21.5%.

According to the Government, tax evasion increased after the VAT hike in June 2010. The previous Government, led by democrat-liberal Emil Boc, increased the VAT from 19% to 24%, in June 2010, as a quick solution to bring more money to the state budget.

The measure strongly impacted domestic consumption and increased tax evasion. The Government estimates that the level of tax evasion increased from 3.4% of the GDP in 2010 to 6.3% of the GDP in 2012.

The private demand showed the first signs of recovery in 2014. However, while the retail trade turnover increased by 7% in 2014 compared to 2013, according to the National Statistics Institute (INS), the state’s VAT revenues actually declined by 1.8% year-on-year, according to the Finance Ministry.

The state’s total revenues from VAT were some EUR 11.4 billion in 2014, which represents 7.5% of the country’s GDP and almost 20% of the consolidated budget revenues.

The VAT cuts the Government plans for next year would impact de budget by some EUR 2.61 billion. However, the Government hopes that these measures will encourage the voluntary compliance of taxpayers, which would increase the volume of taxed trade and help create new jobs. This should bring additional budget revenues of some EUR 1.44 billion, and reduce the impact on the budget to only EUR 1.17 billion.

The Government also expects this will contribute by 1.1 percentage points to GDP growth and create 145,000 new jobs.

Andrei Chirileasa, andrei@romania-insider.com