A month after the adoption of the revised budget, Bulgaria got a surprise: following a meeting with restaurant owners, prime minister Boyko Borissov single-handedly decided to lower the VAT rate for restaurant services to 9%. Until now, only hotel services benefited from that preferential tax rate. After several days of debates, books and some baby goods were also included. On June 10, parliament cut VAT for restaurant services, books, baby food and diapers to 9%, to apply as of July 1 this year until the end of next year.
The decision came as a shock, mostly because the government led by Borissov has time and again told the public that major tax policies will not change during its term in office. Borissov claims that the measure will be temporary and that restaurants are an exception because they were shut down by order of the government to limit the spread of the coronavirus.
It should come as no surprise that since it was announced that restaurants are getting a preferential tax rate, other businesses wanted to have it too. Consequently, the parliament decided the lower VAT of 9% will apply not just to restaurants and bars, but also to books, textbooks, diapers and other baby goods. Hence the government has been so keen to keep the VAT rate equal for all businesses - once an exception is made, everyone would seek to be awarded preferential treatment. This means that when discussions on the 2021 budget begin in autumn, the government may have to start a debate on the need to increase labour or corporate tax rates, as VAT income, which contributes the largest share of budget revenues (40%) is bound to decrease. This would be quite difficult to sell so close to the parliamentary elections due in 2021.
It soon became clear that this is a political move. The Minister of Finance Vladislav Goranov and the chairman of the budget committee in Parliament Menda Stoyanova both strongly opposed the proposal floated by Borissov but did nothing to stop it in parliament.
According to the Ministry of Finance, the cut in VAT for restaurants will cost the budget 150 million levs in indirect tax revenues. Books and textbooks will account for lost revenue of 13 million levs, and baby goods for a further 39 million levs. Moreover, the lower VAT was initially offered to one of the biggest tax-evaders in the Bulgarian economy: according to the NRA, nearly 80% of food and entertainment establishments avoid paying taxes.