The government has proposed a new fiscal package comprising nine measures, at a time when rising prices and citizens’ concerns about the cost of living are increasing.
The measures have varying impacts on state budget revenues.
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Six of the interventions are expected to increase budget revenues by 23.8 billion lek, while the other three are projected to cause a decrease of 19.7 billion lek.
Overall, the package’s net effect is estimated at around 4 billion lek in additional revenue, or approximately 42.3 million euros.
Prime Minister Edi Rama has said that the measures are intended to mitigate the social consequences of the rising cost of living for Albanian families and reduce informality in the economy.
However, it remains to be seen whether the package will succeed in reducing the burden on families, securing sufficient revenue for public services and investment, preserving the competitiveness of large businesses and avoiding placing an even greater burden on small businesses.
One of the main measures is a reduction in VAT on the food basket from 20% to 6%. The change is expected to apply to 54 products, and the government considers it an instrument that could help reduce prices.
According to the explanatory report accompanying the draft law, this measure will reduce budget revenues by 12.8 billion lek.
At the same time, the standard VAT rate is proposed to rise from 20% to 21%, with the aim of compensating for part of the losses created by the VAT reduction on food products.
When these two measures are calculated together with the increase in VAT for tourism from 6% to 10%, the net effect on the budget is projected to be positive, at around 1.6 billion lek.
Accountant Sotiraq Dhamo believes that changes to VAT rates could initially have negative consequences for consumers.
According to him, goods not included among food products subject to the reduced rate, as well as certain services, will become more expensive.
“The increase in VAT from 20% to 21% is expected to be reflected in prices, by at least 1%. Experience shows that tax increases can lead to an even greater rise in prices than the change in the tax rate itself.
This could affect electricity, fuel, water, construction materials, clothing and other goods or services, while wages are not necessarily expected to rise by the same amount,” he says.
Food VAT reductions have long been demanded by producers and importers. For this reason, Dhamo considers the measure positive, but stresses that a tax reduction does not automatically guarantee a price reduction of the same percentage.
According to him, before assessing the measure’s impact, the full cost structure of businesses that determine the final price must be analyzed.
“Reducing VAT on food-basket goods to 6% is a step in the right direction and should have been taken earlier. This has been a demand not only of businesses, but also of citizens and political forces.
However, the experience of other countries, Albania’s own experience and studies conducted by local and foreign experts show that reductions in indirect taxes are not necessarily passed on to prices to the same extent as the reduction in the tax rate.
In other words, reducing VAT from 20% to 6% does not mean that the prices of food-basket products will fall by 14%,” Mr. Dhamo argues.
He predicts that prices may fall, but not necessarily by the same amount as the VAT reduction. This will depend on how businesses pass on the tax cut, transport and energy costs, as well as changes in the taxation of other goods and services throughout the supply chain.
“Some businesses may choose to retain part of the benefit in their profit margin. At the same time, costs may be affected by the increase in VAT on other products and services connected with food-basket goods, including transport and energy.
Therefore, the final price is determined by a number of factors, not only by the VAT rate,” he says.
Fiscal policy expert Sajmir Laçej also views the VAT reduction positively, arguing that it could contribute to lower food prices.
“This is a measure that has rightly been demanded for years. The argument that prices are determined only by supply and demand and that the reduction may have no effect does not hold. Evidence can be found in prices in neighboring countries, where this scheme has been successfully implemented for some time,” he says.
Another change with a direct impact on small enterprises is the reduction of the registration threshold for mandatory participation in the VAT scheme. The proposed annual turnover threshold would fall from 10 million to 5 million lek.
According to the explanatory report accompanying the draft law, expanding the scheme aims to further formalize the economy, increase the taxable base and align the system with recommendations from the International Monetary Fund and European Union policies.
The additional revenue expected from this measure is around 4.5 billion lek.
Entities that have so far operated outside the VAT scheme but will be included because of the new threshold will have to change their invoicing procedures, keep new records and file the relevant tax declarations.
They will also have to review their contracts with suppliers and determine how to treat the goods they have in stock when they enter the VAT scheme.
Sajmir Laçej considers the administrative expenses of small businesses a “hidden tax.” He proposes that the tax administration provide free tax-filing services, particularly for new businesses and small enterprises.
“Meeting reporting obligations creates a cost that businesses pay to accounting offices, especially in the case of entities required to declare VAT.
Reducing the threshold from 10 million to 5 million lek per year brings new expenses, so the tax administration should provide free services,” Mr. Laçej argues.
Some economic experts and members of the Tax Council warn that this intervention could make it more difficult for small businesses to operate and affect their investment plans.
The concern is mainly related to the immediate implementation of the change and the limited time available for preparation.
According to Sotiraq Dhamo, bringing more entities into the VAT scheme will create administrative costs and could affect consumer prices. In some cases, price increases could be considerable, depending on how businesses choose to absorb the new tax burden.
“Lowering the registration threshold to 5 million lek affects both businesses and consumers.
Entities that have so far operated without VAT, with turnover of up to 10 million lek, will have to register in the scheme, keep new records, declare their obligations and change their contracts with suppliers.
These are obligations that generate ongoing costs. Businesses must also decide how to treat the goods they have in storage or in stock,” Mr. Dhamo says.
He adds that some traders may pass part of the new cost on to consumers rather than cover it through their profit margin. As a result, inclusion in the VAT scheme could contribute to higher prices.
“A small retail outlet that has so far sold goods without VAT may raise its prices after registering in the scheme. In certain cases, the increase could reach 20%, while in other cases it could be lower. Everything depends on the cost structure, the profit margin and how the entity absorbs the change,” he argues.
Another problem could be the increase in businesses with recoverable VAT. If refunds are not processed on time and the scheme does not become more efficient, small businesses could face liquidity difficulties.
Dhamo does not believe the measure will necessarily cause entities to close or go bankrupt, but he warns that some of them could face specific financial and administrative problems.
For this reason, he suggests that the threshold for registration in the VAT scheme be lowered gradually, from 10 million to 5 million lek, so that businesses have time to adapt.
“The timing and manner of the intervention are not appropriate, and the process appears rushed. The threshold should be lowered in stages.
The first step could be to move from 10 million to 8 million lek, with implementation in the second half of next year or after a one-year preparation period,” Mr. Dhamo says.
According to him, such implementation would make the measure easier to administer and give businesses time to meet the new requirements.
“In the first phase, a smaller number of businesses would be included and the entities would have an opportunity to prepare. Later, in 2029, the threshold could be lowered to 5 million lek, and a further reduction could even be considered,” he says.
The fiscal package initially provided for an increase in corporate profit tax from 15% to 17%, but the government abandoned this intervention and left the rate at 15%.
The proposed change concerns dividend tax, which is expected to rise from 8% to 15%. This measure is projected to generate around 3 billion lek in additional revenue.
With this rate, Albania would be on par with Serbia, Montenegro and Hungary regarding dividend taxation. Business representatives warned during a meeting of the Tax Council that the increase could discourage investment and encourage the transfer of capital to countries with more favorable taxation.
“Increasing dividend tax and corporate profit tax could place Albania among the countries with high tax rates in the region.
When assessing investment opportunities, foreign investors also take tax levels into consideration. For this reason, Albania could become less attractive, while companies from other countries in the region could gain a competitive advantage.
Higher taxes on VAT, dividends and profits could affect product prices and reduce interest in investing in Albania.
This could lead to part of the economic activity shifting to other countries in the region,” a business representative on the Tax Council warned.
One of the measures presented unexpectedly is the transfer of the 27-lek-per-liter circulation tax from fuel to annual vehicle taxes.
According to the projections, revenue from this category of taxes will increase by 26.6 billion lek. Vehicle taxation currently generates 7.2 billion lek, while after the change it is expected to reach 33.8 billion lek.
The Ministry of Finance calculates a net effect involving a 5 billion lek decline in revenue, while fuel prices are projected to fall by 32.3 lek per liter.
Sajmir Laçej believes that removing the circulation tax from fuel will have positive effects for individuals, tourists and especially the production and supply chain, despite the importance of this tax to the budget.
According to him, this tax has increased transport costs and harmed the competitiveness of domestic producers compared with producers in the region.
However, the real impact will depend on how the reduction is passed on to fuel prices and on the additional burden that annual vehicle taxes may create.
Laçej calls for the fiscal changes not to be implemented immediately. According to him, businesses should have at least one year to prepare, since tax policy predictability is essential for financial planning and the revision of contracts.
“A rule should be established that no change may enter into force until at least one year has passed since its official presentation for public consultation. This would allow businesses to prepare and review their contractual relationships,” Mr. Laçej argues.
He stresses that tax increases should be supported by comprehensive analyses measuring their real impact on the economy, rather than relying only on theoretical calculations of budget revenues.
“The Ministry of Finance should not limit itself to mathematically calculating the theoretical effect of an increase in a tax or duty. In-depth econometric simulations are needed to assess the real impact on the budget, including consumer behavior and the consequences for businesses,” he says.
The expert also calls for other measures to reduce business costs. Among his proposals is an excise exemption for fuels used in technological production processes.
“This is a principle provided for in the relevant European Commission directive and in the Excise Law, but its implementation has been limited through secondary legislation. If Albania aims to be competitive in the region and in the European Union, producers must have a level playing field,” he stresses.
Laçej also proposes eliminating the obligation to pay VAT at the time of import, since prepayment directly affects business liquidity.
“Prepaying VAT may ease the budget’s expenses, but for businesses it is a cost because it affects cash flow. Moreover, arbitrary interventions by Customs in the transaction value can increase the burden even further,” Mr. Laçej argues.
He calls for small businesses to be classified according to their profile and type of activity, while the criteria for deductible VAT should be reviewed to avoid unnecessary expenses, particularly for entities providing services.
Another proposal concerns reviewing capital gains tax on the sale of a first home when the property is used for personal purposes and not for commercial activity.
“Taxing individuals who sell the home in which they have lived for several years for non-commercial reasons is a distortion that is not applied in EU countries and elsewhere. Correcting this situation would free up the market and make periodic revaluation at a reduced tax rate unnecessary,” he says.
The projected effects of the nine fiscal measures are as follows:
1. Increasing dividend tax from 8% to 15% is expected to bring the budget 3 billion lek in revenue.
2. Increasing the standard VAT rate from 20% to 21% is projected to raise revenue by 10.6 billion lek.
3. Reducing VAT on the food basket to 6% is expected to create a negative effect of 12.8 billion lek on the budget.
4. Lowering the registration threshold for the VAT scheme from 10 million to 5 million lek in annual turnover is expected to increase revenue by 4.5 billion lek.
5. Increasing VAT for tourism from 6% to 10% is projected to generate 593 million lek in additional revenue.
6. Increasing the excise duty on tobacco products and changing the taxation of diesel blended with biodiesel are projected to have an effect of 4.1 billion lek on the budget.
7. Raising the threshold for applying the 23% employment income tax rate from 200,000 to 300,000 lek in gross income is expected to reduce revenue by 1.9 billion lek.
8. Introducing a third marginal rate of 30% for monthly gross income above 700,000 lek is projected to generate an additional 700 million lek in revenue.
9. Moving the 27-lek-per-liter circulation tax from fuel to annual vehicle taxes is projected to increase revenue from this category by 26.6 billion lek. Current revenue from vehicle taxation is 7.2 billion lek, while after the change it is expected to reach 33.8 billion lek. The measure’s net effect is calculated as a 5 billion lek decline in revenue for the Ministry of Finance.
