Levies

Are levies being removed because of the EU?

Yes. Levies, which are taxes on products that we import, need to be removed if we are to join the EU - although, of course, they can also be removed if we do not join the EU or if we opt for a free trade area.

But if Malta is to join the EU, which is one single market, it cannot continue to apply taxes, such as levies, that treat differently products that are produced in the EU from products that are produced in Malta.

You cannot be part of one market if you do not have free trade with that market.

The removal of levies started in 1999 when a legal notice published a time frame for the gradual dismantling of levies over a three-year period ending in January 2003. It applied to all products that we import, except for agricultural products and agro-food products.

Some levies were already completely removed on a few products as of October 1999 - things such as diaries (25 cents per kilo), nougat (Lm2.25 p/kg) and computer tables (Lm1.60 per kilo).

In January 2000, levies were also completely removed on another small range of products - toilet paper (40 cents p/kg), insect spray (77c p/ltr), exercise books (25c p/kg) and shirts (Lm1 per shirt).

At the same time, in January 2000, a three-year phasing out programme started with respect to a much wider range of products where levies still applied. Here, levies went down by 20 per cent in January 2001, by a further 30 per cent in January 2002 and by a final 50 per cent next January.

Products covered in this range include furniture, paint, granite, marble but also limited food and drink items such as savoury snacks, fruit juices and nectars and soft drinks.

As a result of the gradual removal of levies under this programme, taxes on imported products obviously started going down. Prices for consumers should also have correspondingly gone down - although the real impact should be more visible after next January.

If we take the case of furniture, we find that levies went down from Lm1.60 per kilo of the weight of every imported item to Lm1.28 p/kg in January 2001, down to 80 cents p/kg last January and down to zero next January. Depending on the cost of insurance and freight (CIF value), levies could also be higher.

This means that your imported cupboard or unit for your sitting room weighing, say, 100 kilos, attracted Lm160 in taxes three years ago. From next January, it will attract zero tax. Never mind an entire sitting room, kitchen or bedroom where the tax share of the price that you pay could run into several hundred liri.

But, of course, the consumer's gain may have well been the local producers' loss. The removal of levies has forced competition not just among imported products themselves but also with locally-produced products.

As a result, local manufacturers must now compete with cheaper imported products and to do so they have to embark on a restructuring exercise to help them shape up for competition and stay in business. For this reason, the Institute for the Promotion of Small Enterprises (Ipse) was set up to guide local small industry through the restructuring phase.

But some businesses may well find it hard to compete against cheaper imports and would have to change their line of production, scale it down or even stop production altogether. Some may find it easier to simply change their line of business to importation. Whereas others chose to get together in order to be in a better position to compete.

This "forced" competition must also necessarily lead to a shift in investment patterns since the local business community is now less likely to go into business areas which have so far been protected from competition - for the simple reason that protection is no longer there. Instead they are likely to engage in other investment in other types of business, generating new economic activity.

Of course, the full impact of competition on these sectors will only be known after the differences in prices of imports become really evident from next January.

Now that the 1999 levy-dismantling programme is well on course, attention has turned to food and agricultural products, where levy protection had so far remained largely untouched.

From this month (July) a similar programme for a gradual removal of levies has started on agricultural produce and agro-food products. This is being done under a scheme which is different from the 1999 programme because it will couple the gradual decrease in levies with a direct financial assistance to farmers and with a reduction in the price of local products.

The first products targeted for lower prices include eggs, pork and chicken.

In this area, levies are at times so high and prohibitive that no competing goods are imported at all, leaving the local market all for the local products - at times at prices that are hardly a deal for consumers.

Yet, since greater sensitivity has been attached to the local agricultural sector, here, levies are expected to be phased out over a longer time frame with a corresponding financial package estimated at seventy million liri over a 12-year period.

However, because this time frame overlaps with the expected date of EU membership, it will need to be negotiated with the EU during the ongoing negotiations process. In particular, the time frame for the removal of levies will be a sure bone of contention. But equally, Malta will be making the case that the EU should help pay for the financial package, whether in whole or in part - rather than the taxpayer having to foot the bill. The results of negotiations in this area are expected towards the end of this year.

Malta-EU Information Centre: Tel: 25909192; Fax: 21227580; E-mail address: euinfo.mic@magnet.mt; Website: www.mic.org.mt

Readers wishing to put questions to Dr Busuttil may do so directly with the centre or through The Times.