TIRANA, Oct. 18 – The Business Consultative Council, a government advisory body on economic policies, has proposed some new changes to the country’s tax system that would see excise tax on tobacco increase, and valued added tax (VAT) on health service and the threshold on VAT inclusion for small businesses lower.
In meeting held last weekend, deputy Economy Minister Alfred Rrushaj said that under the new proposed changes, the excise tax on tobacco would further increase by 20 lek (20 US cents) per packet, climbing to 70 lek, up from 50 lek currently.
“This draft law has been compiled in cooperation with the Health Ministry and is part of measures government has taken to reduce smoking rates,” said Rrushaj, adding that the measure was intended to bring tobacco excise taxes in line with regional and EU countries.
“Currently, a packet of cigarettes in Albania costs considerably less than in EU countries, which should not continue for a long time,” said Rrushitaj.
Referring to the Bank of Albania, the US Department of State says, per capita income was $4,070 in 2009, and is expected to reach $4,200 in 2010, which is far below the EU-27 average. Eurostat data show that across the EU-27, GDP per capita averaged Euro 25,100 in 2008.
Meanwhile, changes to the VAT applied on the health system are aimed at cutting the medicine supply and health service VAT to 10 percent, down from 20 percent currently.
“The cut in the health service from 20 to 10 percent will have an impact on price decreases, both for public and private operators,” said Rrushaj.
Changes to the income tax draft law foresee that bad loans, which have jumped to a record 12.2 percent of the total portfolio, will not be calculated as deductible expenses.
“Another novelty of this draft law is the fact that an important attempt is made to repatriate foreign capital outside Albania,” said the deputy minister, adding that Albanian companies, shareholders in foreign companies, will not be taxed for the dividend they receive if previously taxed in the country where they operate.
“We had this only for resident companies but we extended it also to non-resident companied in order to attract capital outside Albania,” explained Rrushaj as quoted in a statement by the economy ministry.
The Business Consultative Council also suggested that the annual turnover for businesses paying VAT be further brought down to 2 million lek (20,000 dollars) in an effort to fight tax evasion.
Economy Minister Ilir Meta, also the Council’s chairman, assured the business community government will be open and transparent to discuss the new changes.
Tobacco Industry against
The tobacco industry has told government that there are pitfalls that can come from a drastic price increase, creating a lose-lose situation for all – the companies, the government and the customers.
Tobacco makers say the new government policy will lead to more illegal tobacco trade. They say smokers with low income will turn to cheap cigarettes of bad quality that are smuggled in and on which no taxes have been paid.
Faced with the situation, the tobacco industry representatives have proposed the government follow a different plan, which they say will help not only increase government revenue but also allow for a stable market. They want the increases to be made in smaller increments over longer periods of time.
But excise taxes – which are usually levied on things like booze, cigarettes and coffee – make up a good revenue source for the government, which report it made Lek 5.2 billion in excise taxes last year, with Lek 1.9 billion coming from cigarettes alone.
The problem is that when excise taxes go up, so do the instances of cigarette smuggling, and the tobacco industry says it is worried the new taxes would force legitimate companies to fold and illegal operations to thrive.
Government statistics show about 870,000 Albanians smoke, which according to health officials is an alarming rate.
VAT Threshold
Government’s earlier intention of further lowering the value added tax (VAT) threshold for businesses to 3 million lek of turnover a year would put some 90,000 small businesses in the new scheme, experts say.
Currently, around 25,000 businesses with an annual turnover of 5 million lek pay VAT.
Last January, government lowered the VAT threshold to 5 million lek, down from 8 million lek, in an effort to collect more taxes and avoid informality. The move put some 17,000 small businesses in the VAT scheme.
The next decrease of the VAT threshold, which government has not announced yet when it will become effective, is expected to put the majority of small businesses in the VAT scheme.
