VAT threshold reduction doesn’t generate expected revenue

TIRANA, July 2- The reduction in the Value Added Tax (VAT) threshold for small businesses from 5 to 2 million lek (13-40.5 thousand euros) of turnover, has not served as an incentive policy for increasing VAT revenues over the past year. In a special analysis for this purpose, the Ministry of Finance had projected that the revenue effect from this policy was to be 1 billion lek (8 million euros) for 2018, out of which it collected only 0.8 billion lek (6.5 million euros). The total revenues collected from VAT within the country were 36.3 billion lek (297 million euros) during 2018, with an increase of 4 percent or 1.4 billion lek (11 million euros) compared to the previous year, and with realization to the plan at 97 percent or 1.2 billion lek (9.8 million euros) less than expected. The 12-month data of 2018 on the sectoral distribution of VAT within the country show that “Services,” “Production,” “Trade,” and “Building” have the main share in VAT revenues. The largest share in the payment of VAT last year was kept by the services sector with 32 percent of the total paid tax, followed by the manufacturing sector by 26 percent, the trade sector by 22 percent, construction by 18 percent, and the sector of transport by 2 percent. Reduction of VAT threshold for small businesses from 5 to 2 million lek began its implementation on April 1 last year. The International Monetary Fund (IMF) pointed out in its latest monitoring report that the General Directorate of Taxation (GDT) faced a major challenge in 2018 in managing a great expansion of the VAT register after reducing the census threshold. This reduction introduced about 13 thousand small businesses in the VAT system for the first time in April 2018 which increased the [VAT] register by a third. However, the IMF has stressed that the management of this group of taxpayers continuously imposes an increased burden on the GDT with a small return on revenue efficiency. It also brings additional costs to smaller businesses and is unlikely to have any material impact on reducing the tax gap.