Hungary Tops Up Tax Revenue With VAT Hike

by Ulrika Lomas, Tax-News.com, Brussels

03 July 2006

The Hungarian government stated last week that it is moving forward with a proposal to increase the top and middle rates of value added tax in an effort to bolster tax revenues and ease the fiscal deficit.

As a result, the top rate of VAT, currently 20%, will increase to 23%, and the middle rate of VAT, currently 15%, will rise to 17% from September.

The decision reverses a five-year tax reduction programme, begun last year, as the government attempts to bring its fiscal situation in line with European Union rules for adopting the euro. This means that the government's budget deficit can be no higher than 3% of gross domestic product by 2008, in readiness for adopting the euro in 2010. The budget deficit in 2005 was equal to 6.1% of GDP.

The tax reduction plan was designed to decrease state tax revenues to just below 35% of gross domestic product by 2010, down from 38% of GDP, and provide "security in the tax system" by ensuring that tax laws are predictable for the next five years.

According to the government, a one percentage point in the middle rate of VAT will increase annual tax revenues by about HUF35 billion (US$157 million), while a one percentage point hike in the top rate will yields HUF45 billion.

It is thought that the increase in VAT will negate the need for the government to increase income and payroll taxes.

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