Turkey hikes tax rates to reduce budget deficit

ISTANBUL, July 7 (Reuters) – Turkey on Friday hiked value-added tax (VAT) by 2 percentage points and also raised the tax collected on bank consumer loans, in moves intended to tackle a growing budget deficit and also likely to fuel already high inflation.

The VAT rate charged on goods and services rose to 20% from 18%, while that on basic goods such as toilet paper and detergents increased to 10% from 8%, effective immediately, the Official Gazette said.

Among other changes signed into law by President Tayyip Erdogan, the government raised the Bank Insurance and Transaction Tax applied to consumer loans to 15% from 10%.

The registering fee for mobile phones that are brought from abroad jumped by 228% to 20,000 lira, the Gazette also showed.

“Reducing the budget deficit is the aim of the latest increase in taxes and fees, and some other steps to ensure fiscal discipline are on the agenda too. Spending cuts are planned as well,” a senior official said.

“A serious budget recovery is necessary.”

The budget recorded a deficit of 263.6 billion lira ($10.21 billion) in the first five months of the year, compared to 124.6 billion lira a year ago due to increased spending ahead of May elections and the impact of February’s devastating earthquakes in southern Turkey.

The tax increases could raise Turkey’s budget revenues by around 2%, Oyak Investment said in a note.

INFLATION

Annual inflation dipped below 40% in June but is expected to rebound in coming months, driven by minimum wage and other salary increases as well as the fiscal measures, which also include a corporate tax hike.

The new tax measures are expected to raise overall inflation by 1 to 1.2 points, according to a note by QNB Finansbank.

The central bank hiked interest rates last month and pledged to tighten policy further in an effort to tame inflation, reflecting a broader policy U-turn by Erdogan after years of economic unorthodoxy. He was re-elected for five years in May.

Economists said the increased VAT rate charged on goods and services would boost state revenues by around 30 billion lira.

The moves came after the introduction of a draft law in parliament earlier this week that seeks to increase corporate tax to 25% from 20% for earthquake-related funding needs.

The earthquakes in February in southern Turkey killed more than 50,000 people and left millions homeless in the country’s worst natural disaster of modern times. Business groups, economists and the government have said rebuilding efforts could cost more than $100 billion.

Separately, Turkey on Friday also exempted from witholding tax the dividend payments of own shares purchased by companies listed on the Istanbul bourse.

($1 = 25.8070 liras)

Reporting by Ezgi Erkoyun, Burcu Karakas and Orhan Coskun; Editing by Jonathan Spicer and Gareth Jones

Our Standards: The Thomson Reuters Trust Principles.