Background information

After a meeting between representatives of the restaurant industry and government leaders, in May 2020, the Bulgarian government decided to decrease the value added tax (VAT) from 20% to 9% for dining and catering services, under the requirement that the minimum social іnѕurаnсе threshold fоr аll еmрlоуееѕ іn thе ѕесtоrѕ 'Ноѕріtаlіtу', 'Rеѕtаurаntѕ', 'Trаvеl аgеnсіеѕ' аnd аll оthеr асtіvіtіеѕ rеlаtеd tо trаvеl аnd rеѕеrvаtіоnѕ is rаіѕеd frоm ВGN 610 (€300) tо ВGN 800 (€400).

After debates in the parliament, the parliament agreed to decrease VAT also for baby foods and nappies, books and textbooks to 9%. Added tax for food and pharmaceuticals remains 20%.

The estimated budget loss from this reduction is estimated at BGN 20 million (€10 million) for a year and a half.

In Bulgaria, the standard tax rate for consumption goods is 20%; an exemption make accommodation services with permanent VAT rate of 9%.

Content of measure

The VAT rate for restaurant and catering services, books and textbooks, baby food and diapers is reduced from 20% to 9% The reduced rate comes into force on 1 July 2020 and will apply until 31 December 2021.

The reduced VAT should cover all goods and services offered in restaurants, including certain alcoholic products such as beer and wine. Although, VАТ іѕ аn іndіrесt tах іntеndеd tо tах thе fіnаl сuѕtоmеr, іtѕ rеduсtіоn during the pandemic is not intended to benefit the final customer; tax cuts should increase restaurants' profits. According to the government, this measure shall help restaurants mitigate the economic impact of the COVID-19 pandemic.

The measure is implemented as part of a package of measures to support the real sector and the sectors most affected by the crisis.

Use of measure

Reportedly, the measure was implemented by affected parties immediately after its adoption (10 June 2020), although it should have taken effect at a later stage (1 July 2020). This created controversy between business and government and created chaos in revenue agencies.

Public and experts hold that the application of VAT reduction has been implemented too randomly. According to the media, in most of the cases, the reduced VAT is not transferred to the final customer.

The reduced VAT for restaurant services does not apply for takeaway food, which is still taxed with 20%. This contributes to further public tension, as the measure explicitly supports dining at restaurants in time of COVID-19 pandemic.

Restaurants claim that so far their turnover has shrunk by 30% due to the COVID crisis. The summer data of the National Revenue Agency show a minus of 10%. The political condition for a lower VAT was to lighten the sector, but so far there is no visible evidence. The preliminary evaluation of the measure shows negative results in terms of effectiveness, as the measure has been sometimes abused by beneficiaries.

In the first two months after the introduction of the lower VAT rate, however, the nominal indirect tax paid was nearly 65% less than in July and August last year, according to the National Revenue Agency (NRA). The sector has become brighter only to the extent that some establishments have raised the insurance of their employees.

The situation in the report on the state budget for 2020 shows the same: the fiscal effect on the revenue side is significant, without leading to solving the problems in these sectors, which were highlighted as the main goal for the reduction of VAT.

Target groups

Workers	Businesses	Citizens
Does not apply to workers	Sector specific set of companies Companies providing essential services	Does not apply to citizens

Actors and funding

Actors	Funding
National government Employers' organisations Company / Companies	No special funding required

Social partners

Social partners' role in designing the measure and form of involvement:

	Trade unions	Employers' organisations
Role	Informed	Consulted
Form	Not applicable	Direct consultation outside a formal body

Social partners' role in the implementation, monitoring and assessment phase:

• Only employers' organisations
• Main level of involvement: Sectoral or branch level

Involvement

Negotiation among involved parties was intransparent. However, the measure was discussed within the National Council for Tripartite Cooperation, but was not supported unanimously. The government did not listen to all social partners and decided to negotiate directly with representatives of a specific industry, ignoring national interests.

Views and reactions

The social partners and experts were not unanimous on the implementation of the measure. The unions were strongly opposed, and employers' organisations were divided. According to the unions, economic policy should be made through the elements of expenditures, not through revenues in the budget. The Confederation of the Unions does not approve differentiated VAT and proposes general VAT decrease from the current 20% to 15%.

According to the employers, it is not clear why exactly these industries are prioritised, especially since the current government in Bulgaria has repeatedly stated that it will not change the tax system until the end of its term.

As of October 2020, representatives of tourist and restaurant businesses evaluate the measure as 'good' as the additional profit made by the tax cut has saved many companies from bankruptcy. Some representatives say that the rise of the social insurance minimum in the industry has led to higher personal costs, but it does not constitute a complaint, as it will give staff more security in case of unemployment due to the COVID-19 containment measures.

The Bulgarian Institute for Market Economics warned that the differentiated tax reliefs were introduced without any expert evaluation; and will potentially harm demand equilibrium in many industries. Furthermore, according to the institute, the measure can cause increased risk of circumvention and tax fraud. They categorise the measure as 'political' and not 'economic'.

The extension of the measure in December 2021 was discussed with the national representative social partners organizations. The employers organizations insisted on extending the VAT reduction in 2022 and proposed amendments to be adopted concerning the scope and the duration of the measure. The Confederation of Independent Trade Unions in Bulgaria opposed the VAT reduction for the restaurants since no relief to the upward consumer prices is introduced by the restaurant owners.

According to Dimitar Manolov, leader of Confederation of Labour "Podkrepa", the VAT reduction measure could have been extended to other sectors as well with the extension decision adopted in December 2021.

Sectors and occupations

This case is not occupation-specific.

Sources

• 15 May 2020: GERB has further expanded the range of activities with reduced VAT (www.economic.bg)
• 22 May 2020: Parliament cuts VAT to 9% for restaurants and books (www.mediapool.bg)
• 29 May 2020: Preferences through differentiated VAT rates will have an adverse socio-economic and fiscal effect in the medium and long term Прочетете повече на: https://ime.bg/bg/articles/preferencii-prez-diferencirani-stavki-na-dds-shte-imat-neblagopriyaten-socialno-ikonomieski-i-fiskalen-efekt-v-srednosroen-i-dylgosroen-plan/#ixzz6YnEQXOVQ (ime.bg)
• 10 June 2020: ДДС за ресторантьорски услуги, книги, бебешки храни и пелени става 9 процента (parliament.bg)
• 19 July 2020: CITUB requested a general reduction in VAT Прочети още на: https://www.dnes.bg/stranata/2020/05/17/knsb-poiska-obshto-namaliavane-na-dds.449997 (news.bg)
• 28 July 2020: The services of the gyms also with 9% VAT The services of the gyms also with 9% VAT The services of the gyms also with 9% VAT (www.monitor.bg)
• 23 October 2020: VAT bill, please (www.capital.bg)
• 23 October 2020: ДДС сметката, мол (www.capital.bg)
• 08 November 2020: Диференцираният ДДС мина по пътя на COVID и зави в нова посока (www.investor.bg)
• 06 December 2021: Тристранката не удължи намаленото ДДС за заведенията (news.bg)
• 23 December 2021: Удължиха ставката от 9% ДДС за книгите и туризма до края на 2022 г. (news.bg)
• 23 December 2021: Удовлетворен ли е бизнесът от намаленото ДДС (nova.bg)
• 11 February 2022: The reduced VAT will be applied until the end of the emergency epidemic situation (www.investor.bg)
• 18 August 2022: VAT decrease remains until 31. Dec 2022 (nra.bg)