Event of the Month

Easing the burden?
2004 budget stirs political controversy
written by Eszter Breer

After weeks of fiery debate within the member parties of Hungary’s ruling coalition, the government tabled its 2004 budget proposal, which contained substantial changes in tax regulations. The draft was slated to be discussed by Parliament beginning the week of Sept. 29. Among its highlights are proposed decreases in income tax and corporate tax levels, as well as a rise in value added tax (VAT) and health contributions.

As part of the government’s amendment package, the corporate tax rate would decrease from 18% to 16% in 2004. The current 100% tax break granted to large investors and employers would also decrease by 20%, however, criteria for eligibility would be easier to meet. The minimum required value of investment to be eligible for tax relief would be halved from the current HUF 10 billion. At the same time, the government-set requirement for the number of newly employed workforce would decrease from 500 to 200. In underprivileged areas, the tax relief will be granted to investments amounting to HUF 1.5 billion instead of the current HUF 3 billion, while the required employee number will be slashed to 100 from 300. In an additional decision aimed at boosting investment, tax benefits would be available for 10 years, a doubling from the current five years.

"The 2% decrease [in corporate tax levels] will be almost insignificant for those large multinational companies which due to tax breaks pay already a low tax. For SMEs, the savings will not be sufficient to finance a new investment," said László Zara, chair of the National Association of Hungarian Tax Consultants and Accountants. "But a tendency is good, reaching a 12% tax rate would be favorable."

The government also proposes increasing the upper revenue limit, under which enterprises may choose the simplified entrepreneurial tax EVA. The flat tax scheme, introduced by the Medgyessy government, levies a 15% income tax on companies and will be available to enterprises with HUF 25 million maximum in annual turnover. The current limit is HUF 15 million. "EVA is used predominantly by enterprises with an income under HUF 10 million thus a higher upper limit is unlikely to attract many companies with higher income," said Zara, adding that several hundred companies with income above HUF 10 million had chosen EVA. The EVA system has more than 66,000 users.
Concerning the personal income tax, coalition parties agreed, following tough debate, to decrease rates. Annual revenue less than HUF 800,000 will be subject to an 18% income tax, down from the present 20%. Revenue between HUF 800,000 and HUF 1.5 million will be taxed at 26%, replacing the current 30%. And earners with the highest revenue will pay a 2% less tax at 38%. No tax would be paid on the minimal wage, which currently stands at HUF 50,000.
Monthly family allowances will rise by HUF 300 per child, by HUF 600 for two children and HUF 1,200 for three children. At the same time, the government plans to increase health contributions paid by employees by 1% to 4%.
" The changes will result in a HUF 500-2,000 surplus every month," estimated Zara.
In the case of VAT, the most important change is the modification of tax rates. The current 0% VAT rate will grow to 5%, while the 12% rate will be increased to 15% and the highest rate of 25% will stay unchanged, in opposition to previous plans. According to the proposal, termination of the 0% tax rate is required to comply with European Union directives.
Products so far in the 0% category include drugs, human nutriments, certain aids for the handicapped and books.
Gas and heating services will be taxed at 15%, unlike electricity and fuel, which fall into the 25% tax bracket.
" The hardest bit to take will be the change of the VAT of food products from 12% to 15%. This will hit primarily the poorest, and will probably use up the surplus gained at the modification of the income tax," said Zara. "These families will probably have to decrease their consumption of goods falling into the 25% VAT category to be able to buy their food," he added.
Coalition MPs are lobbying for the proposed tax changes by emphasizing that the government policy intends to substantially increase the competitive edge of Hungarian enterprises, balance the taxpayers’ burden and reduce employee taxation.
At the same time, opposition parties argue that the government-imposed burden on businesses will grow and taxpayers will pay more in 2004. Referring to calculations from the largest opposition party, former Minister of Finance and current Fidesz MP Mihály Varga said a blue collar worker is likely to lose HUF 15,000, a white collar worker HUF 28,000 and a pensioner an entire month of pension in 2004.