The CES gave a negative opinion on the draft law on certain fiscal and budgetary measures

The Economic and Social Council (CES) gave a negative opinion, in the Monday meeting, to the draft law regarding some fiscal budgetary measures meant to ensure the long term financial sustainability of Romania showing that the measures for the reduction of expenses are unconvincing and will have negative effects on the economy.At the same time, CES says that they have already given their negative opinion in connection to the elimination through emergency ordnance of the predictability and stability obligations of the Fiscal Code."The cost-cutting measures are unconvincing. The government has proposed to collect 100 billion lei (85%) from the private sector and only 16 billion lei (15%) from public spending efficiency, or this imbalance needs to be adjusted; covering the budget deficit by measures to increase the tax burden on the private sector has proven in the past to have the opposite effect, and it is very likely that, as a result of these measures, budget revenues will decrease rather than increase. Increased taxation stimulates tax evasion, and the state authorities have so far proved incapable of controlling the phenomena of tax evasion and undeclared work; the business environment needs predictability and stability for healthy economic development, which is denied by the implementation of these measures from 1 January 2024, i.e. within three months, instead of six months as provided for in the Tax Code; the restrictions on facilities for SMEs are unjustified. The government does not take into account the specific features of this category of economic operators, and the premise on which the increase in turnover tax  is based on a hypothetical profit rate of 12.5% that would be achieved on average in the SME sector," the document states. CES considers that over taxation of the micro-enterprises will burden those which pay and will not affect those practicing fiscal evasion."The 3% income tax on micro-enterprises is in no way justified, the companies concerned are SMEs, which are the most vulnerable and have been subject to multiple shocks for the last 3 years. In general, this type of companies have a low degree of capitalization, and the effect of what is proposed by the draft will be that the additional burden on SMEs will be directed to consumers/beneficiaries and automatically reflected in prices that will rise again. An increase in taxes will reduce the profitability of SMEs, which may be forced to close or reduce their activity, including through redundancies which will gradually reduce budget receipts, with the risk of insolvency and bankruptcy, especially given that this proposed approach comes after the negative effects of the pandemics on top of which the multiple crises that are underway (border war, energy and fuel prices, etc.) have been superimposed. Exporting companies will also be at a clear disadvantage when competing with companies from countries that do not have such burdensome taxation. It also seems unjustified that loss-making companies are put in the position of having to pay corporation tax at the level of 1% of turnover. These firms, already in a difficult situation, will be decapitalised or even sent into insolvency," the document says. According to CES, turnover taxation is a measure with negative effect on the economy influencing in a negative way the perspective of economic development. For some sectors it will be a heavy blow (retail, energy, automotive) and in the other cases, it will create major distortions. This will decrease the competitiveness of exports and it will be transferred in prices as VAT. The turnover tax, including in the financial system is not limited in time, so it will turn into a permanent tax. According to CES this is not a normal fact and it should be kept in mind that it will produce increase in prices or financing costs. Moreover, in many situations, the proposed model will lead to double taxation, as it is the case, for example, with the companies for energy supply."In addition, the introduction of a special tax on high-value immovable and movable property and its application to goods acquired before the law entered into force is retroactive and violates the principle of legal certainty, according to which taxpayers must be able to rely on existing legislation when making financial decisions related to the acquisition of goods. As regards the special tax on vehicles worth more than 375,000 lei, this measure could block European efforts to reduce greenhouse gas emissions, as the new tax will discourage the purchase of new, more fuel-efficient and less polluting vehicles. Another problematic aspect of this provision is that the current regulation omits the exclusion of leasing companies from paying the special tax; a very serious point is that the immediate and medium-term effects will lead to a significant slowdown of the economy," the document states. According to CES, the restriction/reduction of facilities in areas previously considered by the Romanian Government as "priority sectors of national importance for the Romanian economy", namely the IT, construction, agriculture and food industry sectors, are unjustified and are likely to reduce the competitiveness and attractiveness of these sectors for investors, to increase the human resources crisis, to stimulate undeclared work, tax evasion and unfair competition. At the same time, the net incomes of those currently working legally in these economic sectors will be reduced as a result of the reduction in tax concessions. By eliminating the exemptions, the Romanian labour force will be attracted to the labour market in other EU countries. Moreover, CES argues that the modification of the facilities in the construction sector violates the agreement concluded in 2018, for a duration of" 10 years, between the Romanian Government and the Employers' Federation of Construction Companies, an agreement that was transposed into the Government Emergency Ordinance no. 114/2018.    ‘As regards meal vouchers, the government considers that they do not generate losses in their value by applying CASS of 105% as through emergency ordnance of the government no.69/2023, the value of the vouchers will increase starting with 1st August 2023 to 35 lei, and starting with 1st January 2024 to 40 lei. In the draft law there is no mention of the obligation to grant tickets at the maximum value by the employer. Therefore, for a large part of the employees, there is an obvious loss on the meal vouchers segment, ‘the quoted source states.For companies in which the State is the majority shareholder, vacant posts are abolished once the law comes into force, which creates problems in their operation due to a lack of executive staff, and for companies with which they work in a competitive environment (e.g. CFR Calatori, CFR Marfa), discrimination is created by not being able to size their staff in relation to the activity carried out. According to the quoted source, by increasing the fiscal burden the competitiveness of the Romanian enterprises will be affected in comparison to those who operate in the neighbouring countries which have a fiscal regime comparatively more favourable than Romania.The CES argues that the proposed restrictions on the number of employment contracts of employees in the areas in which facilities are granted is likely to infringe the right to work, a fundamental right of citizens enshrined in the Constitution. "The introduction of an additional 1% turnover tax for certain categories of businesses will have the effect of increasing costs for the final consumer; the increase in the cost of exercising the liberal professions as a result of the increase in fees, in particular for the exercise of the legal profession, is likely to restrict access to justice for people with lower incomes, who will not be able to afford to pay the increased lawyers' fees; the increase in the tax burden on the private economic environment will be reflected for businesses in increased production costs and, consequently, in higher prices paid by consumers. As a result, this law to 'increase Romania's financial sustainability will contribute to an even greater deterioration in the population's standard of living; the tax measures presented in the draft have not been based on impact assessments, and the measures have been adopted in breach of the provisions of Law No 24/2000 on the rules of legislative technique for the drafting of legislative acts, republished, with subsequent amendments and additions. Moreover, the initiator, in the explanatory memorandum, under the headings '3.4.1. Impact on the economy and on the main macroeconomic indicators' and '3.5. Impact on the business environment' states that 'this is not the case', even though all the measures mentioned in the draft will result in: an economic downturn due to entrepreneurs restricting economic activity or even going out of business because of the impossibility of sustaining taxes and duties; an increase in prices due to economic operators passing on the additional costs generated by fiscal policy to consumers; an increase in the inflation rate; a fall in consumption', the CES opinion states.   On the other hand, CES warns that a possible merger of educational establishments with fewer than 50 employees will clearly lead to a blockage in the operation of the respective institutions.‘The real time allocated since the initiation of the draft for consultation and debate is ridiculous, especially as the issue of budgetary deficit has been known for a long time; the trade union organisations have formulated requests on the basis of provisions art.7 (9)law no.52/2003 with amendments and completions, regarding the decision-making transparency in public administration; the lack of ample public debate can lead to the adoption of measures with serious economic and social impact’ the document says.