Reducing VAT on fuels is not an effective measure to address high prices in Bulgaria. This is the conclusion of an analysis by the Fiscal Council, prepared against the backdrop of calls for a reduction in the tax.
According to the Fiscal Council, reducing VAT does not address the main reason for the price increase - the global shock in the supply of energy resources. Bulgaria is a “price-taking” economy in international markets, which limits the influence of internal tax policy on prices.
Reducing VAT may temporarily lower prices, but it does not increase supply and does not reduce import costs. Instead, it may stimulate demand and slow down market adjustment.
The effect of reducing VAT is limited due to the incomplete transfer to consumers. Businesses can retain part of the benefit in the form of higher profits, especially in the absence of competition. This reduces the effectiveness of the measure.
Reducing VAT is expensive for the budget, as VAT is a major source of revenue. This may limit the funding of other priorities. In addition, the benefits of lower VAT are distributed proportionally, which makes the measure less effective compared to targeted assistance.
The Fiscal Council emphasizes that reducing VAT leads to a limited and short-lived effect on prices. Reducing VAT may undermine long-term policies for energy efficiency and the transition to sustainable sources.
As a result of rising fuel prices, industry organizations and political parties are making demands for measures, including reducing VAT. The government has announced measures to support those in need and a package of measures is expected to support businesses.