Higher VAT proposal attracts mixed reactions

A proposal to raise VAT by three percentage points was expected to be one of the hotly-debated issues as the Malta Council for Economic and Social Development today convenes in Gozo for a crunch meeting over the budget with Finance Minister John Dalli.

Mr Dalli last Saturday gave the constituted bodies two reports - one on the budget, the other on another hot potato, pensions.

The reports deal with, among others, measures to tackle abuse, reforms for the distribution of social benefits, agriculture and fisheries, consumer legislation and the need to help the self-employed raise productivity. One of the reports includes the higher VAT proposal.

The VAT increase is expected to partly finance an obligatory free health scheme, according to sources, though it is not known whether this will take the shape of some consumption tax.

Representatives of the constituted bodies started meeting at the Mgarr Hotel last night for a marathon "retreat" session starting this morning.

Members of the constituted bodies, who preferred to remain unnamed at this stage, yesterday told The Times they feared an increase in the VAT rate would have an inflationary impact.

Businesses will have no choice other than to absorb the mark-up or transfer the cost onto the consumer, one official said.

One other union spokesman said an increase in VAT would do nothing more other than create a vicious circle.

"Such taxes would put pressure on employers to hike up salaries and we all know that this could ultimately hamper competitiveness and the shedding of labour."

The government should also take into consideration that salaries in other EU member states were higher and direct taxation rates lower, he said. VAT is a general consumption tax assessed on the value added to goods and services.

Malta's VAT rate has stood at 15 per cent since the tax's introduction in 1995. Increasing it by three percentage points across the board would mean bringing it on a par with countries like Greece and Estonia (see list below).

Every member state of the EU has to adopt the VAT regime, though the rates vary from 15 per cent in Luxembourg to 25 per cent in Sweden.

Recently adopted VAT legislation includes Directive 2001/4/EC, stipulating that the minimum standard VAT rate set by member states must be 15 per cent, which will be in effect at least until December 2005.

A spokesman for one of the social partners said he would have no objection if VAT were increased on certain items as was done in most other EU countries. An increase across the board, however, would only harm the economy.

Tourism has a preferential rate of five per cent, though it is not known whether the proposed increase would also apply for this sector.

The government is not proposing any VAT on foods and medicines as it has obtained in the EU negotiations an exemption until January 2010.