Measures to raise revenue

A raising of the top VAT rate by three percentage points to 18 per cent and other revenue raising measures, particularly a broadening of the tax net on property sales, were announced by Finance Minister John Dalli in the Budget for 2004 yesterday.

The minister said this budget was aimed at returning government finances to the road of deficit reduction, the ultimate aim being for the deficit to slip below three per cent of GDP in 2006 from the current 6.3 per cent.

The reduction of the deficit to below three per cent of GDP is a key requirement for Malta to be able to adopt the euro currency. Mr Dalli underlined that objective, saying yesterday it would be appropriate for Malta to take the first step (towards euro adoption) by applying as soon after accession as possible for Malta to participate in ERM II (the EU's exchange rate mechanism) by early 2005.

Mr Dalli said GDP growth this year had reached 0.8 per cent in real terms, having been affected by the negative international climate and local uncertainty because of the holding of the EU referendum and the general election. Real GDP growth was expected to reach 1.3 per cent next year.

The deficit this year would reach Lm108 million - Lm33 million more than originally projected - even though the government had at one point half way through the year feared it could rise to as much as Lm126 million. For next year the deficit was expected to reach Lm95 million or 5.4 per cent of GDP.

Mr Dalli said the government planned to cut the deficit by Lm20 million per year through more efficient tax collection and tighter control on spending, so that by 2006 the deficit would reach Lm52 million or 2.8 per cent of GDP.

Government revenue this year would reach Lm741 million, Lm21 million more than in 2002 but Lm30 million less than projections because of shortfalls in revenue from social security, Customs and VAT receipts owing to weaker economic activity than anticipated.

Total recurrent expenditure would reach Lm742 million, an increase of Lm5 million over projections, mostly due to higher outlays on social services, while capital expenditure would total Lm106 million, down by Lm1.8 million on projections.

For next year, Malta would receive Lm33 million from the EU including Lm21 million in grants and Lm12 million in co-financed projects and programmes but the island would pay Lm29 million including Lm18 million as its contribution to the EU, Lm4 million as its share of the co-financing of projects and Lm7 million as subsidies on agricultural products.

Malta will also receive another Lm18 million through the Italian financial protocol.

Mr Dalli said the government next year expected to have a recurrent revenue of Lm843 million, recurrent expenditure of Lm811 million and capital expenditure of Lm127 million. Capital expenditure would be up by Lm20 million from this year in view of the Mater Dei Hospital project, which next year alone would take Lm43 million.

The main revenue raising measure announced in the budget yesterday was a raising of the VAT rate to 18 per cent from the current 15 per cent, as from January 1.

All receipts from this increase, expected to total Lm21 million, would be credited to the health account.

VAT on tourism services would remain at five per cent and no VAT would be imposed on food and medicines.

Mr Dalli said the VAT increase was expected to bring about a once - only increase in inflation of 1.9 per cent. A special one-off bonus of Lm39 would therefore be given in March as compensation. Those receiving supplementary allowance would also receive a special bonus of Lm13 next year.

These allowances were over and above a 75c per week cost of living increase.

On property, Mr Dalli said the government was acting to clamp down on tax avoidance. First time buyers of homes would not be affected but provisions for exemption of duty on documents and on capital gains in cases of restructuring of businesses were being repealed.

In the case of share transfers of companies whose main assets were real estate, it would be clarified that for the purposes of income tax, capital gains tax and duty on documents, the tax due would be computed as if there was a transfer of property without any reference to liabilities or price residue. Any reduction in the seller's share value through an increase in capital or similar transactions would be considered as a tax evasion scheme.

Promise of sale agreements would henceforth have to be registered and they would be charged a stamp duty of one per cent which would be set off against duty paid when the contract was eventually signed. The tax would be refunded when the sale did not take place.

Property inherited after November 22, 1992 (when the law on succession was amended) would be subject to tax when sold, like all other properties. Property inherited before November 23,1992, would be subject to a final tax of seven per cent when sold.

Mr Dalli announced higher excise duty on tobacco products so that, for example, a packet of king size cigarettes would from today cost Lm1.45 (from the current Lm1.25).

He also announced an increase in the registration tax on imported second hand cars as from December 1. Thus, for example, vehicles with an engine capacity of between 1800 and 2000 would be taxed Lm4,200, an increase of Lm200.

On the health service, Mr Dalli said statistics showed it did not make sense for all health centres to be opening at night and on Sundays. Certain services in health centres would be restricted to holders of the pink card and the provision of free medicines under the yellow card system would be subject to means tests.

The government also planned to hold talks next year so that people who were hospitalised after accidents and were covered by insurance, those covered by a private medical insurance scheme and foreigners would be billed for services in state hospitals.

The contribution of elderly people in state homes will rise to 80 per cent of their pension, instead of the current rate of 60 per cent of all their income. However, Mr Dalli said, the current minimum amount of Lm550 per annum retained by the elderly will be raised to Lm600 and low income elderly people would therefore not be affected by this measure.

Mr Dalli said an eco-contribution would be introduced next year, starting with a levy on bottles, in a bid to encourage producers to supply their products in returnable containers.

He also announced that preliminary agreement had been reached for the management of Malta Freeport to be sold to CMA/CGM, the freeport's biggest client, for 30 years.

Talks had also been concluded with a Greek-Maltese consortium which would be running public lotteries for seven years. The agreement would be signed early next year.

The government next year also intended to go ahead with the sale of its remaining shares in Maltacom and Bank of Valletta.

Budget at a glance

VAT raised to 18 per cent. Once-only compensation of Lm39.

Broader taxation on property sales.

Higher excise duty on tobacco products.

Higher registration tax on imported second hand vehicles.

Further easing of exchange control.

Elderly in state homes to contribute 80 per cent of their pension.

New eco-contribution will start with a levy on non-returnable containers.

Means test to be imposed on provision of free medicines.

Hospital treatment will be billed for those who are privately insured, victims of accidents covered by insurance and foreigners covered by insurance.

Cost of living increase of 75c weekly.