February 23 – March 1, 2015

Finance Ministry is seeking alternative sources to replenish budget

The situation has not changed
Finance Ministry is seeking alternative sources to replenish budget

Amid deteriorating financial situation in the country, the Belarusian budget requires additional revenues. The government has already adopted some measures to improve fiscal positions in 2015. However, proposals to increase the tax burden on the IT field are excessive and could hamper the IT industry development.

A draft presidential decree envisaging an increase in income tax rates, as well as an increase in compulsory insurance contributions for HTP (High-Tech Park) has been elaborated.

The financial performance of the Belarusian economy in the past three months leaves no grounds for optimism. In December 2014, the Belarusian economy losses totalled BYR 3.9 billion. In January 2015 GDP fell by 0.4%. Lay-offs are trending in various economic sectors, which reduces the Social Security Fund’s revenues. Oil prices at USD 60 per barrel reduce Belarus’ proceeds from export duties on oil and oil products. Prices have been frozen by administrative means, which, on the one hand, reduces imports of goods, and on the other hand, reduces income from VAT and customs duties. In the given circumstances, the Belarusian budget requires additional sources of revenues.

The government has already adopted some measures in order to increase budget revenues. For instance, labour experience requirements for a pension have been raised. As a result, about 1000 people in 2015 will continue to work without receiving a pension. The average retirement pension in Belarus is USD 175 per month, so with this measure in place the budget will save circa USD 2.1 million in 2015. The export duty on potash fertilisers (EUR 45 per tonne) has been re-introduced, which may result in additional revenues of EUR 400-450 million. In 2015, charges on depreciation on fixed assets and intangible assets have been lifted, which may lead to an increase in net income and, consequently, in the tax on profits.

The government regards the IT industry as the new source for budget revenues. The draft Decree envisages increasing the income tax rate from 9 to 10%, which could raise circa USD 2.4 million for the budget. Those working in the IT would also make higher payments to the Social Security Fund, thus increasing budget revenues by USD 35 million.

If the draft decree is adopted, the rapidly developing IT industry may slow down. In addition, some services might revert to ‘shadow’ schemes thus reducing budgetary proceeds. Some companies might change their country of registration to one of the EU member states. As a result, the government’s plans for additional funds might be derailed and revenues might reduce. That said, Belarus’ investment image might be undermined, since the immutability of benefits for the HTP had been guaranteed by a decree until 2020. If privileges are revoked, companies assuming long-term cooperation with Belarus may withdraw production from Belarus. In the view of the outlined negative effects, the most reasonable solution would be to scrap the decree and preserve the existing benefits. The authorities could raise additional funds by optimising the government and reducing state aid to unprofitable enterprises.

The Belarusian budget has problems with sources of revenue. Some measures, proposed by the government aiming to bridge the finding gap may lead to adverse results. The authorities should raise additional funds by reducing governmental costs and state aid to unprofitable enterprises.

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