Shift to indirect taxation could mean rise in price of fuel, alcohol and cigarettes.

Higher excise duties and possibly car licence fees could be announced in the Budget for 2015 in line with the government’s policy of shifting from direct to indirect taxation.

Economists who spoke with this newspaper said that, within these parameters, the only option would be to raise duties on products like alcohol, fuel, cigarettes and possibly revise upwards government fees, with vehicle licences being touted as a possible option.

The Malta Chamber of Commerce, Enterprise and Industry yesterday expressed concern and urged the government to reconsider such measures.

“We are opposed to any further increases in consumption taxes until such time that the government puts into place effective structures to ensure a level playing field for all besides a fair share of tax revenue for the government and protection for the consumer,” the Chamber said.

It expressed concern that the prospect of raising the tax differential between Malta and neighbouring EU member states was not acceptable as it rendered smuggling all the more attractive, to the detriment of government coffers and tax compliant businesses.

In the draft Budget submitted to the European Commission, published two days ago, the government declared that its policy was to “shift [the] tax burden away from labour income while still keeping the same VAT rates”.

Economist Lino Briguglio welcomed the policy. He said direct taxation, like personal or corporate income tax, came directly from the income of an individual or a company.

“Compared to indirect tax, this form of tax has the disadvantage of being easier to evade and costlier to enforce due to the administrative apparatus needed,” Prof. Briguglio noted.

He remarked that direct taxation could lead to distortion if it discouraged investment or employment.

“Income tax in Malta is progressive and, therefore, it is proportionately higher for high-income earners when compared to low-income earners,” he said.

We are opposed to any further increases in consumption tax

On the other hand, indirect taxation such as VAT and excise duty is levied on expenditure, whereby the price includes this tax.

Prof. Briguglio said this form of taxation was not as distortive as income tax and had the advantage of being easier to collect and harder to evade.

“However, it has the disadvantage of tending to be regressive because its impact is proportionately higher on low-income earners,” he pointed out.

Economist Karm Farrugia said he was impressed by the fact that the emphasis on indirect taxation was coming from a Labour government, which was traditionally inclined towards direct taxation.

“The reason is that direct taxation impacts more on the rich than on low-income earners and so is more appealing to left-wing parties,” he noted.

However, he remarked that the decision not to increase VAT was fundamental as it safeguarded low-income earners.

“The minister was realistic enough to acknowledge that, after all, reducing direct taxation would result in the creation of jobs and more investment from which everyone would prosper,” he added.

The draft Budget document listed the expenditure and revenue projections for next year as a share of the gross domestic product. To give a better picture of the situation, this newspaper translated these figures to euros, based on the provisional GDP estimate for last year, which stood at €7,186 million, according to the National Statistics Office.

According to the estimates, the government is projecting a shortfall of €17 million as a result of the reduction in the middle income tax bracket, down by four percentage points, from 29 to 25 per cent.

Other measures which will weigh on the Budget will be €5.7 million towards an annual supplementary children’s allowance and a higher equity injection in Air Malta to the tune of €24.4 million as part of the restructuring plan.

The one-off investment registration scheme fee received in 2014 will also result in a drop of €9.3 million in revenue as well as lower temporary revenue estimated at €1.4 million.

The government is forecasting an income of €41 million from the citizenship scheme, an additional revenue of €21.6 million in indirect taxation on consumer goods and services and €4.3 million from a revision in fees in market output.

Revenue from national insurance contributions is set to go up by about €10 million as the pensionable age this year will be raised further.

The government is planning to offset the upward pressures in expenditure through better control of the public sector wage bill.

The target is to save about €8.6 million a year by lowering the replacement rate in non-priority areas and to control the non-wage component of personal emoluments.

As a result, the net impact of these discretionary measures would leave the government an additional €50 million in revenue.