Tax Policy – 2021-2023: Controversial Measures and Arguments of the Ministry of Finance
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In early October, the Ministry of Finance submitted for public discussions the draft fiscal policy for 2021; or rather - the draft fiscal policy for the next three years. A lot of experts' opinions on the planned changes have already been published, and, at times, their opinions are opposite. Someone in some way fully supports the Ministry of Finance’s project; someone fully criticizes it as far as the same matters are concerned. But everyone notes as positive the fact that the document is designed for three years. The business environment has always requested this for medium-term planning, and it is beneficial to the budget as well in terms of revenue planning.
In the list of the main tax revenues to the state budget excise taxes occupy the second position after VAT: they account for 15-20% of the treasury revenues. This year, receipts from excise taxes were planned at 6.6 billion lei (out of 44 billion total receipts, including non-tax receipts). Of this amount, 2.5 billion lei account for excise taxes on oil products; 2.2 billion lei - excises on tobacco products; 1 billion lei - on cars; and 0.9 billion lei - on other goods, including strong alcohol, luxury goods, etc.
Based on these figures, the Economic Press Club invited Deputy Prime Minister, Minister of Finance of Moldova Sergiu Puscuta, State Secretary of the Ministry of Finance Dorel Noroc, as well as business representatives and economic experts to discuss the state's excise policy (as part of the general fiscal policy) for the next three years.
As Dorel Noroc noted, the following four principles are the Ministry of Finance’s basis in defining the new excise policy: increasing budget revenues (the growth of revenues depends, first of all, on the growth of excise taxes); reducing the attractiveness of goods that are harmful to human health; fulfillment of Moldova's commitments to the European Union and the excise taxes rates applied in neighboring states. Thus, the draft document for 2021-2023 envisages an increase in excise taxes on tobacco products - by 15%; oil products - by 9% (as much as the nominal GDP), alcoholic beverages - by 5% (to approach the EU level). In addition, excise taxes on cars worth over 600 thousand lei will increase by 50%, which is the practice of distributing income among different segments of the population through budgetary mechanisms.
During the Economic Press Club discussions, State Secretary of the Ministry of Finance Dorel Noroc emphasized that in 2020, receipts from excise taxes on tobacco products are the only excisable item in which over 20% increase was registered: for 9 months of 2020, it provided additional receipts totaling 249 million lei to the budget compared to the same period last year.
It happened so that tobacco products are the most discussed topic both from the taxation viewpoint and from the tobacco control perspective. Moldova has adopted some of the toughest laws in this area, and our country stood out last year for a tenfold increase in excise taxes on certain types of tobacco products (and this was in the middle of the year).
In the Club meeting, it was noted that in 2020 the increase in excise taxes on tobacco products amounted to 13%, and this could be considered a balanced increase, which led to a good result for the budget, because a sharp increase, as practice shows, always harms market participants and the budget. Nevertheless, in the draft new tax policy, the increase in excise taxes from 2021 will be even greater and will amount to 15%. At the same time, experts present at the Club meeting noted that, as far as some positions of tobacco products are concerned, the growth actually exceeds 19%, and this can lead to market destabilization due to an increase in smuggling and counterfeiting, which will lead to reduced budget revenues. We should not forget about the ongoing pandemic, its negative effects on the economy and the drop in the purchasing power of the population.
Director of the Institute for Market Economy Roman Chirca noted in this regard that in many countries this year, besides the growth in consumption of tobacco products, consumption of alcohol and chocolate also increased. There is no such statistics in Moldova, especially since wine is a food product in our country, and beer is taxed at "own" rates.
This, by the way, was noted by the expert of IDIS Viitorul Veaceslav Ionita, who considers that in each specific case the state should have a different attitude towards each type of product and apply differential taxation, as is the case in Moldova with wine, beer, and strong alcohol. The state should clearly promote the idea of discouraging the consumption of alcohol and tobacco by levying higher taxes on the most harmful products to human health; thereby demonstrating that it also shapes the behavior of citizens through fiscal policy.
Apparently, this also applies to the non-abating topic in the mass media regarding the products that are less harmful to human health; for example, products for new technologies on nicotine delivery into the body. Indeed, many countries apply differential taxation: fewer taxes for less harmful products, more taxes for more harmful ones. Modern innovative products have constantly proven to be less harmful to human health, and manufacturers (and even doctors in a number of countries) urge the state to stimulate people to stop smoking in favor of more advanced and less harmful technologies.
When being asked why excise taxes on low-risk tobacco products (such as tobacco heating systems) in Moldova are equal to the tax rates applied to ordinary cigarettes, while in most European countries their taxation is differentiated and is always less than the taxation of traditional cigarettes, the Secretary of State answered literally the following: “It is not clear to me which product carries a lower health risk, so that I can answer what excise rates to apply. Products such as tobacco heating systems are used by people with higher purchasing power. As for health, this is not a topic on which I can speak, since these are new products, and the experts’ opinions on their account are different. Nothing terrible happened on the market last year (note: when excise taxes on tobacco heating products increased 10 times), but budget revenues increased. And now we can spend more money, including on health care, which is especially important today. "
At the same time, no answer was given to the question why in Moldova all tobacco products are taxed the same, while liquids for vaping, which are also not safe for human health and contain nicotine, generally dropped out of the list of excisable goods, despite the huge growing popularity of vaping, especially among young people.
Besides the tobacco topic and justifications regarding the increase in excise taxes, the increase in excise taxes on oil products was also justified: in Moldova, the average growth of gross national income (GNP - not to be confused with GDP) is about 9%; the excise tax on oil products will increase as much as this figure, which will naturally fall on the shoulders of the end users.
The cost of petroleum products will increase from 2021 for one more reason: it will include the road tax. Thus, as noted by the Ministry of Finance, those who use the road infrastructure more will pay a higher road tax. And this will not affect the further distribution of the received tax, the proceeds from which will be distributed as before, for road repair and construction. As far as the needs of agriculture are concerned, it is planned to increase the volume of subsidies by the amount of the road tax that agricultural machinery will pay, since it will be included in the cost of fuel, thereby compensating for their costs.
The topic regarding the road tax to be paid by owners of electric vehicles is not yet clear. Even today they are exempt from paying it, nevertheless they use the roads. Dorel Noroc suggested that perhaps it could be included in the electricity price for electric car owners, but this issue requires careful consideration.
The representatives of the alcoholic industry raised the issue of taxing denatured alcohol intended for the needs of the perfumery, cosmetic and medical industries. In many countries it is not subject to excise duty. The products of our manufacturers, who pay excise taxes on denatured alcohol, lose competitiveness compared to the imported counterparts and are not interesting for export. If you would ask for quotas for denatured alcohol, then this should be done before the beginning of the year, which is unacceptable for business in flexible work conditions in international markets. Dorel Noroc in this regard noted the difficulties in fiscal control due to which tax violations were previously registered. This ultimately led to the current situation. As a solution, he proposed to revise the procedure for granting quotas in order to make the procedure for issuing these documents as efficient as possible - up to signing individual contracts.
Two more important topics were touched upon within the Club meeting: the need to limit local taxes and waste management. In the first case, the matter concerns the fact that the authorities of municipalities and cities set inflated local fees, which is still legal, but kills business, since in fact taxation is actually duplicated, especially on excisable goods (tobacco and alcohol). The need to put things in order and set maximum fees is obvious.
The environmental fee issue caused a lot of discussions, but not disputes. The country has seriously started discussing the issue of "waste management", since from 2023 Moldova will have to abolish the environmental fee. Nevertheless, it is a source of subsidies for collecting and disposing garbage.
Deputy Prime Minister Sergiu Puscuta expressed confidence that the waste collection and disposal business should be economically profitable. There are several options for this, but he considers the state subsidies to economic agents who will be engaged in this the most correct. “All the money we receive from the environmental fee should be divided according to the amount of waste and returned in the form of subsidies to those economic agents who will collect and recycle it. This should not be the interest of the state budget as an additional source of income, it should only be regarded as the redistribution of funds from the garbage importer or producer through the state to the entity that collects and recycles this garbage. "
As the director of corporate relations of EFES Moldova Ludmila Andronic noted, this year many representatives of the business environment and business associations note the maturity in the work and attitude of the Ministry of Finance towards business: it understands the principles and the reasoning why certain taxes and fees are increased, reduced or canceled; why certain types of subsidies appear or disappear.
One cannot accept all the proposals of the Ministry of Finance, but today there is an opportunity to express our position, there is a dialogue and comprehension. This, perhaps, has not occurred in all Moldova's years of independence. //29.10.2020 - InfoMarket