Lower VAT for drugs and social housing

Certain goods and services might see a lower VAT quota as of next year, Mihai Hura, deputy director general within the Finance Ministry yesterday said. “The low quota will almost certainly be levied on drugs and certain consumer goods, and, if the budget can accommodate it, on construction of housing through social programmes. For instance, we might have lower VAT for electrical or thermal power supply,” the Finance Ministry official said.

“The Finance Ministry is currently considering the possibility of introducing the low VAT quota, probably 9%, depending on the capability of the state budget to hold it,” Hura told the “Real estate development, construction and operation” conference organised by Fin Media. He added the ministry was planning to bring the fiscal legislation in line with the European Union norms until the end of 2006, considering 2007 was proposed for the EU accession.

“The European Union has Directive VI, Appendix H, which says applying a lower VAT quota for certain goods and services, social housing construction inclusive, is not in breach of the directive. But before we can introduce such a measure, we need to clearly define what social housing is,” the Finance Ministry official specified. In Romania, the only entity building social housing for low-income young people is the National Housing Agency (ANL).

The housing construction used to benefit from zero VAT until last year, but this incentive was dropped as of June 1, 2002, as requested by the IMF.

“This regulation was a major headache, because it came with a broad legislative framework and was not much help to those it targeted, i.e. the young people not making a great deal of money. Actually, the zero VAT benefited those who could afford to order a turnkey home built by a company and then have their VAT refunded,” Hura explained. The only contracts now VAT exempt are those concluded with the ANL prior to May 31, 2002.

Romania got a series of VAT dispensations during the accession negotiations with the EU, such as the possibility to have all types of international passenger transport VAT exempt. At the same time, Romania got a low VAT quota (no less than 5%) for a series of products like basic foods, drugs, construction of flats, with Romania left to decide when to introduce it.

Certain CEE countries levy low VAT on foodstuffs. The Czech Republic, for instance, levies 5% VAT on foodstuffs, compared with the standard 21% VAT, while Hungary levies 12% instead of the 25%.

The IMF recommended to adamantly reject any project to cut VAT. Why? Because this measure could gravely undermine the efficiency of the fiscal administration, which would have to focus on repaying VAT to more and more applicants than it does now. Moreover, the IMF feels properly directed transfers to low-income households are better than any possible social effects of a low VAT. bogdan.neagu@zf.ro