Turkey to cut tourism VAT

ANKARA (Reuters) – Value-added tax in Turkey’s key tourism sector will fall to 8 percent from the current 18 percent in 2008, the official gazette said yesterday, in a move already criticized by the International Monetary Fund. VAT on most foods will also see tax cut from 18 to 8 percent, though this will not affect staples like bread that are already taxed at just 1 percent. Some of the reductions in VAT on food will be made this year, said the gazette, which records the final decisions of the government. The revenues administration said the tax rate on a number of food items including packet soups, desserts, fruit juices and pastries would be cut to 8 percent on June 1. The IMF has said the planned VAT cuts are inconsistent with Turkey’s commitments to the Fund under a $10 billion loan deal. Analysts have linked the sweeping tax cuts to general elections set for July 22. Several sectors of the $400 billion economy have been demanding lower taxes to help business, particularly tourism. The lower VAT rates will apply to all tourism services such as hotels and restaurants. «This cut will cause no weakness in tax incomes. Implementation will also be easier as tax on all food items is reduced to 8 percent,» the revenues administration’s acting chairman Osman Arioglu said. Senior economic officials said the tax cuts would lower revenues in 2008 by nearly 800 million lira ($600 million). «There will be little burden on the budget this year,» said an official from the finance ministry. The government said it had postponed some of the tax cuts on food items to next year because they would put too much pressure on the budget. IMF concern Turkey’s $10 billion standby accord with the IMF has supported the country’s recovery from a deep financial crisis in 2001. The global lender has urged Ankara to maintain a tight monetary policy while pressing ahead with structural reforms. Finance Minister Kemal Unakitan this week defended the decision to cut taxes in an interview with Reuters, saying it was necessary to help the tourism sector remain competitive. Turkey hopes to raise its tourist numbers after a fall last year following bombings in tourist resorts, protests over Danish cartoons lampooning the Prophet Mohammed and the killing of an Italian Catholic priest. Analysts said the impact of tax cuts on inflation would depend on the retail prices. «Since companies may not fully reflect the tax cut in their final prices, they are likely to benefit from this VAT cut but the impact may not be significant, depending on price adjustments,» said Raymond James Securities chief economist Ozgur Altug. The decision to put the tourism sector tax cuts into effect only in 2008 is good news, Altug said, since budget discipline has already loosened this year due to «populist» government measures ahead of July’s elections.