RIGA - The value-added tax rate could be increased to 23 percent in order to stimulate economic development, reports Latvia's Economy Ministry's task force to the National Economy Council, reports news agency bbn.ee. Economy Minister Artis Kampars said at the National Economy Council's meeting that even though a higher VAT tax rate would diminish residents' purchasing power, the higher tax would not have a significant effect on local enterprises and producers, and it would also limit expansion of the shadow economy.
The task force report says that increasing the VAT rate will have to be considered if reducing costs, and other plans to increase state budget revenues, do not produce the desired fiscal effect. The report also says that compulsory state insurance payments could be increased by four percentage points, with a progressive tax that could be introduced in 2011.
The task force emphasizes that taxes on labor must not be raised, as this could damage Latvia's competitiveness and promote unreported employment. Because of the need to increase budget revenue, the task force suggests expanding the income tax and property tax base, as well as introducing capital gains tax and property tax.
If personal income tax rate is set at 10 percent, the 2010 budget revenue could increase by 14.7 million lats (21 million euros). The report also proposes altering the criteria for micro-enterprise status, giving it the new status of net turnover not exceeding 7,000 lats a year, with a staff of no more than five.
The task force's proposals also envisage renewing corporate income tax breaks for large-scale investments made within a specific period of time, as well as reducing taxes on investments in technological equipment, which is hoped to increase the volume of investments in Latvia by 27.8 percent in five years.
The report says that the proposed changes must be introduced beginning Jan. 1 next year.
Latvia has pledged to bring down its budget deficit to comply with European Union rules by 2012; this would allow the country to adopt the euro two years later, reports Bloomberg.
Latvia will reduce its budget gap to 8.5 percent of gross domestic product next year following an estimated 10 percent gap in 2009, the government told the International Monetary Fund in a Letter of Intent dated July 27, and just released to the public. The country's deficit is expected to be within the EU's 3 percent threshold within three years, says the letter.
"While policy implementation is hugely challenging, we are committed to containing external and fiscal imbalances, and preserving the long-standing exchange rate peg until our goal of euro adoption by 2014," the government said in the letter.
Latvia's economy contracted at an annual 19.6 percent rate in the second quarter, its steepest decline since the collapse of the Soviet Union and the second-deepest slump in the EU, after Lithuania. "We have already committed ourselves to introducing 500 million lats, or 4 percent of GDP, in targeted expenditure cuts and tax measures" in 2010, the government said.
The government expects the economy to start recovering in late 2010. Output probably will contract 18 percent this year overall, and 4 percent in 2010, it said.
Latvia has cut state salaries, increased taxes and reduced pensions and maternity payments to meet the terms of its EU and IMF bailout. The government is planning further spending cuts and wants to broaden the tax base to improve public finances.
Targeted revenue gains include a planned increase in the value added tax rate to 23 percent from 21 percent effective from January, according to the letter. The VAT change will boost the budget by about 0.5 percent of GDP, the government estimates. Latvia will also raise the personal income tax rate to about 25 percent for people with higher incomes.
Latvia's euro peg means the country needs to restore its trade competitiveness through wage cuts and structural measures, including closing some schools and hospitals. Other budget reductions include defense cuts, which will help save as much as 1.4 percent of GDP in the budget, according to the letter
The government reiterated its commitment to maintaining the currency peg to the euro until eventual adoption of Europe's single currency.
