The Tax Code approved by the Parliament stipulates the VAT cut to 19%, the scrapping of special constructions tax and the fuel excise duty and not the lowering of social insurance tax rates and the flat rate tax cut initially proposed for 2018 and 2019.
Finance Minister Eugen Teodorovici said the budget impact of the VAT standard rate cut to 19%, from the current 24%, will amount to RON9 billion (EUR2 billion), or 75% of the total revenue drop expected for next year at RON12 billion.
Romanian authorities have also recently informed the European Commission that they plan to keep the budget deficit below 1.2% of the GDP in the 2016-2018 period.
IMF and EC officials have warned Romania’s new Tax Code will create a significant fiscal deficit, which could prove difficult to correct.
“It is our assessment that the tax package as approved by the government would create a significant fiscal gap compared to the government’s fiscal targets,” said Guillermo Tolosa, IMF Resident Representative in Romania. “Finding offsetting measures to bridge this gap would be very important, but also very challenging,” Tolosa also said in a statement earlier this week.
Teodorovici said the Finance Ministry now sees the deficit at 2.8%-2.9% of GDP next year, but it won’t slip above 3% of GDP, which would trigger an excessive deficit procedure against Romania.