BUDGET 2003

Budgetary measures

Following are extracts from the section of Finance Minister John Dalli’s budget speech in which he outlines the budgetary measures being implemented in order to meet government targets over the medium term

Dalli explains that government’s strategy is being underpinned by:

• Promoting the better utilisation of our resources in order to reduce the negative impact on the environment;

• To continue attracting economic operators to invest in the areas mostly benefiting the country so that we create employment and wealth;

• We create incentives for innovation so that we continue to generate new economic activity in order to ensure the creation of wealth and employment for the future;

• We reduce beaurocracy in order not to hamper those who want to work or to create employment for others;

• To consolidate and spread education and culture;

• To increase consumption with a larger share from the liquidity available so that we accelerate economic growth with a positive effect on the creation of employment;

• To ensure that no one falls back.

Fiscal measures

Cigarettes

Earlier last year, the World Bank Regional Consultation on the Economics of Tobacco Control was held in Malta. The main theme of the conference was to continue debating effective inter-collaboration between the health and the educational sectors so that there would be more control on tobacco consumption and reduce the devastating damage of smoking.

Today everyone is aware of such damage and all pubic and private authorities, both locally and abroad, are doing their best to keep public places free from smoking. Notwithstanding this, one shudders to read that in Malta more than 16% of teenage girls under 14, that is those who are still attending school, and more than 15% of their male counterparts already smoke.

Therefore, it would be of benefit that we continue to increase taxation on tobacco as a cutting instrument for increasing the cost for those who smoke in order to induce them to cut down on smoking.

• We are increasing excise duty on cigarettes so that a packet of 20 king size will cost Lm1.25c at retail price while a packet of 20 standard size will be sold for Lm1.10c.

• Excise on hand-rolled tobacco will come up to Lm22.25c per kilogram.

• Excise duty on cigars will go up to Lm5 every 20 units.

Registration tax and road license for motor vehicles

Certain rates on Vehicle Registration Tax as well as some categories of road licenses for vehicles will be adjusted as follows:

Racing cars

Motor racing is becoming more and more popular with events taking place every Sunday.

In order to regularize the position of enthusiasts and in order to assist this sport we are reducing the Vehicle Registration Rate for cars for specially equipped racing cars by 6.5% instead of the current rates of between 50.5% and 75%.

Naturally, given that these specially equipped cars are not driven on public roads, there will be no payment of road license in their regard.

Vintage Cars

In Malta there is also an ever-growing interest among enthusiasts who collect vintage cars. These are preserved, restored and in many cases driven on roads for exhibition purposes.

In 1996, we had reduced the rate in the Registration Tax for these vehicles to between 11% and 16.5% for those which are 50 years old. However, these same vehicles, notwithstanding that they have benefited from this reduction, could not be used on the road.

All vehicles and motorcycles that are certified as classic, vintage or authentically veteran, will pay, as from 1 January 2003, the following new rates:

• Vehicles manufactured before 1 January 1951 will pay between 11% and 16.5%;

• Vehicles manufactured between 1 January 1951 and the 31 December 1970 will pay 50% of the rate registration;

• Road licenses for these same vehicles will be reduced by half.

Import duties

In the Budget for these last four years, we have adjusted the import duty rates on goods imported from Europe. This was necessary after the previous administration had to increase these duties, as was dictated to him by the European Union, after the haphazard change in the indirect taxation system in our country.

This exercise will produce some reductions in import duties on products while it may increase somewhat those on other products.

Levies

As was announced in 1999 we will continue with the dismantling of levies. As from 1 January 2003 the levies on all industrial products listed in Legal Notice 123 of 1999 will be removed. In the case of furniture, these levies were removed last October after Government considered a specific request by the manufacturers themselves.

Levies in the agricultural and agro-industrial sectors will be adjusted somewhat during next year. This however will have no impact on local products.

TAXATION

Foreigners’ income tax

In January 1998, a scheme was launched under which foreigners could choose to take up permanent residence in Malta under certain conditions. These were obliged to transfer to Malta a minimum of Lm6,000 annually in their respect and another Lm1,000 annually for every dependent person. Those under this scheme paid tax at 15% on these amounts subject to a minimum of Lm1,000 annually.

This rate was never reviewed and time seems opportune to review the scheme so that, while we continue to show these foreigners that they are more than welcome among us, we would at the same time update the system in the light of the experience gained during these last 14 years and also make the amounts compatibly with present times.

The present minimum amount that these would require to bring to Malta will be retained. Tax will continue to be paid at the rate of 15% on all monies transferred to Malta. For tax assessment purpose, the minimum will go up to Lm12,000 without any deductions and will cover all members of the family.

VAT

Negotiations with the European Commission are still in progress also on the exemption of VAT on food, medicines and printed matter.

We shall also undertake some changes in order to harmonize our VAT legislation with the EU directives.

VAT payment at import stage

As soon as Malta accedes as full member to the European Union, VAT on taxable products imported in Malta from Member States will no longer be collected at import stage as at present. In the case of goods imported from third countries the current procedure will be retained.

In the case of taxable products for sale, VAT will be collected and will be passed to the Department in the same tax period when the sale takes place.

All this will be of direct benefit for those who import from the European Union as we shall cut down on procedural form-filling and on the need for Customs to examine imported goods. In addition to this, the importer will improve his cash flow and his administrative costs will be reduced.

VAT in the tourism sector

The VAT rate in the tourism sector will remain at 5% on accommodation as at present.

VAT payment on electricity consumption

As from 1 January 2003 electricity consumption that is currently exempt without credit, will be subject to a 5% VAT rate. However like in all other cases, electricity bills will not increase for consumers because this VAT cost will be wholly covered by Enemalta.

VAT on cylinder gas

Cylinder gas will be subject to a 15% VAT rate which will also be wholly absorbed by Enemalta and will not have any negative impact on consumer prices.

This measure will also serve to solve the current problems for the distributing agents of this product.

As these two measures will not impact on retail prices, no VAT refunds will be made to retailers.

VAT on cultural teaching

In order to continue promoting the spread of culture among the general public, Government is granting tax exemption on VAT on the teaching of ballet and of music. Therefore, as from 1sat January 2003, these activities will be exempt without credit in the same way as other educational activities.

Refund of penalties from VAT and Income Tax Departments

It is satisfactory to note that in our country the compliance levels are high in regard to the submissions of tax declarations for VAT and Income Tax as well as in the timeliness of payment settlements. Even this year, we have reached 93% compliance in the case of VAT and 92% compliance for Income Tax.

This is more evidence that Maltese do not shun discipline when this is fairly applied.

After discussions in the MCESD, we agreed that the time was ripe to review the penalty and the interest payment system that are currently in adoption while we hope that this will not impact negatively on the levels of discipline that we have achieved.

Penalties

Current tax legislation provide for an automatic system of penalty administration in both departments of VAT and Income Tax that will trigger off at the first contravention. This system will be reviewed, so that those who normally observe the law but who in abnormal circumstances do not meet their obligations under the Act, they will not be initially penalized but will be admonished. In the case of a relapse, the penalties will be triggered off as at present under the system.

Penalty on duty on documents

We shall be reviewing the procedures relating to penalties attached to discrepancies between the contractual value of property and that as determined by the Commissioner of Inland Revenue for the purposes of Duty on Document Act.

This penalty which currently amounts to ten time more the duty effected by the discrepancy will now be reduced to twice the same duty effected. This penalty will be further reduced gradually according to the time lag utilized for its payment.

Outstanding balances from VAT 1995 and from CET

At the same time, other administrative measures will be taken, by which taxpayers will be in a better position to settle their outstanding balances under the VAT 1995 and under CET. These measures, which will involve around 15,000 assessments, which between them make up a total of Lm4.6 million in penalties, will provide precisely for the reduction of these penalties to more reasonable amounts within the legal framework. This reduction will be made on a percentage scale linked to a time frame with which the taxpayer will be asked to agree. These measures will not apply to interests due on outstanding tax.

Provisional tax

In the case of Provisional Tax on taxable income, till now, where an enterprise declares profit which had not been expected by the end of the year and, therefore, would not have been otherwise declared for the purposes of the provisional tax due in April and in August, will incur a penalty and interests calculated for the whole of the year. A change in this procedure will be introduced so that, where profits which would be realized during the last four months of the year and which will not be normal seasonal profits, the penalty and the interest will be calculated on a four year instead of on a twelve year period.

VAT refund

We have accepted another suggestion from MCESD which, in the case of VAT, refund due to an enterprise that provides goods and services which are VAT exempt, will be made in four instead of five months in 2003 and in three instead of four months in 2004. This would help the cash flow of the enterprises involved.

ENVIRONMENTAL / PROPERTY

Electrically-driven vehicles

In the Budget two years ago we reduced the Registration Tax for vehicles that run on alternative energy and on battery-operated motor cycles. During these two years, while the rate for vehicles that operate on a hybrid system, that is those who consume both fuel and battery energy, will be retained at 16.5%, vehicles that run only on an electrically driven system will be completely exempt from Registration Tax.

For the next five years, for electrically driven vehicles, we are repealing the tax due to enter Valletta.

Products that benefit the environment

It would be well to provide incentives the use of products that impact less on the environment either because of their inefficiency or because they are degradable or recycled products. Also, import duties on these products will be reduced as follows:

• Recycled paper and bleach-free paper will be 0%;

• Degradable refuse bags will be reduced from 8.4% to 6.5%;

• Shopping bags manufactured from recycled paper and carton from 6% to 3.7%;

• Consumption reducing-electricity bulbs from 4.9% to 2.7%.

Road license for battery operated mopeds

In order to highlight Government’s commitment to induce more people to use means of transport that impact less on the environment, we are repealing the payment of road license for battery operated mopeds.

Incentives for the improvement of property registered under the Voluntary Registration Scheme for Valletta, Floriana and Cottonera

While the national average of the number of vacant elements and of those in a dilapidated state is 6% of residential units, the percentage in their regard in Senglea and Cospicua goes up to 11%, that for Valletta and Vittoriosa goes up to 26%, while that for Floriana goes up to 15%.

Earlier this year, Government launched a Voluntary Registration Scheme under which applicants will benefit from less payment for registration.

The owners of these tenements in Valletta, Floriana and Cottonera have been asked to register their property and the Lands Registry received 2,248 applications. In order to create incentives for these applicants to rehabilitate their tenements, we will be launching a scheme under which the amount equivalent to the VAT payment on costs will be refunded. This scheme will apply only on works that require a Full Development Permit from the Malta Environment and Planning Authorities.

More details will be announced later on.

MEASURES TO BENEFIT ENTREPRENEURSHIP

Small Enterprises

In the last Budget, we introduced measures to reduce administrative procedures for self employed and for small enterprises.

These were:

• The costs that small enterprises make on informatics will be deducted from the profits for that same year:

• Income tax exemption on profits realized in years 2002-2004 in instances where such profits are reinvested in new projects, in the purchase of new machinery, etc. in order to increase and develop the business:

• VAT refunds due to small enterprises will be made within 30 days from the date of the VAT returns provided that these are sent on time.

These measures have been made for small enterprises and for self-employed that employ an average of five persons and with a turn over that would not exceed Lm100,000. We are meeting the recommendations discussed within MCESD so that this scheme would be extended.

We do not deem it opportune to extend the scheme to all enterprises. However, from 1 January 2003, these measures will also apply to enterprises that employ an average of 5 persons and whose turnover does not exceed Lm250, 000.

Access to information systems

We shall launch an Assistance Scheme so that those who are self-employed will have full access to information systems that will make it easier for them to communicate with Departments and other public organizations. Exemptions of fees, and through free training on the use of these systems, shall be of further incentive to the self-employed for them to make wider use of these facilities, that will serve them better and cut on delays for them.

To provide incentives to those who want to invest in research.

We shall increase the right for each enterprise to declare for income tax purposes expenditure incurred on research and development, with the purpose of creating and improving products, processing method’s materials and other equipment. These enterprises are entitled to increase the deduction on these cost by 20%. This increase will be pushed up to 50% and, therefore, for every expenditure of Lm100 they will have a deduction of Lm150 from their taxable income.

Procedures to reduce cases before the Tribunal for Small Claims

The Department of Inland Revenue has been demanding for some time that, among others for a credit to be declared as bad debt there should be the necessary legal procedures followed by a Court Degree. This has lead to a substantial increase of cases before the Tribunal For Small Claims which had the primary aim, not of collecting the outstanding credits but of obtaining a Court Degree for bad debt.

An analyses of cases that have been brought before the Tribunal since 1 January 2001 and last June revealed;

• 77% of the cases were made by companies, and that

• 66% of the claims were under Lm500, and

• another 13% were between Lm501 and Lm750.

Therefore we are proposing a reform to reduce the procedures in the way companies can turn credit into bad debts without the need to go before the Tribunal. This reform, the details of which will be published later on, will include a number of conditions, which while reducing the cost for the business, would ensure that the system will not be abused.

Measures to remove exchange control requirements

The liberalisation programme for exchange control will continue next year. After in recent years we removed controls on medium and long-term transactions, during next year we will remove in stages the major part of the remaining controls. The residual controls that will relate to short-term capital transactions will be removed upon accession. Hence we will ensure that we will not be exposed to volatile movements of capital that can destabilise us. On the 1 of December the Central Bank will publish measures that will take effect from 1 January 2003. During the year, other measures will be announced. The Central Bank will announce these measures one month in advance of their effective date.

These measures will have the objective to increase the amount that Maltese citizens can send or invest abroad in foreign currency and which provides greater flexibility for local trade to operate in foreign exchange.

Now that we have reached this stage in the liberalisation of exchange control, we shall repeal the existing legislation, that is the Exchange Control Act and we shall propose new legislation to be adopted. This will be the Exchange Transactions Act that will provide the necessary infrastructure for full liberalisation while giving the Minister of Finance with the necessary authority to introduce measures and controls in times that would be critical for the balance of payments.

Measures so that nobody will fall behind

Within our existing limits we need to improve the quality of life for those who are in need. We are undertaking measures that would be beneficial and which will remove existing anomalies within the current system.

Capital means test

Last year, we introduced a measure by which those entitled to the non-contributory Old Age Pension, had their means test increase from Lm4,000 to Lm6,000 in the case of single persons and from Lm7,000 to Lm10,00 in the case of a married couple. We are now making this same measure applicable also in the case of the means test for those in receipt of Social Assistance, Medical Assistance and Social Security Pension.

SOCIAL MEASURES

Increase in supplementary allowance

In order to provide for those with less income, we are reviewing the scheme for Supplementary Allowance so that not only more persons will come to benefit but also there will be an increase in the amount of entitlement. Therefore, with effect from 1 January 2003, income eligible for Supplementary Allowance in the case of a married couple will go up from the current Lm3,370 to Lm4,200. For those who are single the current entitlement of Lm3,270 will be retained. Hence, where the income of a married couple is between Lm3,370 and Lm4,200 they will be entitled also for this benefit.

The ceiling on which this benefit will be calculated, that is Lm10,270 in the case of a married couple and Lm8,270 in the case of a single person will remain the same. The percentage rates which are applicable on the difference between the existing levels and the income of the beneficiary will be also reviewed. The rates that will be used in the calculations will be increased. In the case of a married couple, these will go up from 1.5% to 1.75% and in the case of a single person from 1% to 1.25%. The threshold for income applicable for these calculations will be retained at Lm2,220 for all beneficiaries.

This is more evidence of social solidarity which the present Government does not only preach but also practices with those in need and who may, therefore, fall back.

Payment for maintenance of children in cases of marriage separations

Last year, we introduced a measure that concerned maintenance payment in the case of a married couple separated by mutual agreement. This did not impact on the way the payment for maintenance of children would be taxed. According to the Income Tax Act, this payment cannot be deducted from the income of the paying partner while the same amount would be taxable with the income of the receiving partner.

Therefore, from next year, we will introduce another measure so that the partner that receives payment for the maintenance of children will not be taxed on this amount.

Increase in children’s allowance for three children and more

For those with three or more children who benefit from Children’s Allowance we shall increase the rates on which this benefit is calculated. Hence, the rate for those with three children will go up from 11.5% to 12%, those with four children from 13% to 14% and those with more than four children the rate will be increased by 2% as against the current 1.5%.

This measure will benefit more than 4,400 households whose benefit will increase by an average of Lm1 per week.

New procedures in the working of tax calculations on arrears of pensions

After our meeting with the Federation of Pensioners’ Associations, we agreed on the way to undertake the amendment in the Income Tax Act so that tax arrears arising out of revisions of pensions will be spread on the respective years of income on which the pension arrears were due.

Therefore, this will apply:

• on all arrears paid on 1 January 2003, provided that these do not go back to prior 1999. In this case the arrears due before that year will be added on to the income of 1999 for tax purposes:

• on all arrears paid between 1999 and 2002, provided that these will arise as a result of erroneous calculations on pensions made by some Government Department.

Increase in the cost of living for pensioners

In the electoral programme of this Government we had promised the workings of a new Cost of Living Index for pensioners that would reflect in a fair way the expenditure patterns of pensioners.

From studies that have been undertaken, it emerged that expenditure trends of a pensioner are different from those of one who is still in employment and who, perhaps, is bringing up a family. It has therefore, emerged that a pensioner-household spends more, or 60% of its income, on food, personal care, and on healthcare. At the same time, they spend less, or 46% of their income, on domestic needs, transport, education, entertainment and recreational activities.

For this purpose, calculations were based on the inflation rate for these last 12 months as this affected pensioner-households with an income of less than Lm55 per week. This income represents the average income of a pensioner-household.

When you apply the Price Index worked on the expenditure patterns of the pensioner-households which I already mentioned the weekly increase in costs amount to Lm1.27c.

Therefore, with effect from the first Saturday in 2003, pensioners will receive the whole amount by way of cost of living increase that emerges from the Retail Price Index for pensioners. This will replace the 2/3 of the Cost of Living Increase that results from the All Index.

Hence, the increase benefiting these pensions will reflect in a better way the rise in the cost of living as it affects them. As a result of this, in 2003, the increase in the cost of living for pensioners will Lm66.04c instead of Lm60.67c for which they would have been otherwise entitled under the previous calculations. This means an increase of 9%.

We shall be amending the Schedule attached to the Social Security Act so that the increase resulting from the Retail Price Index for pensioners, which I have just mentioned, will be reflected in the Two-Thirds Pension rate, and the Survivors’ Pension, the Retirement Pension, the Invalidity Pension, the Widows Pension, as well as for the rate paid to single persons in receipt of the National Minimum Pension, and in the rate paid to a single person under the Old Age Pension.

This is another important development in the social benefits sector in our country.

Justice with casual social assistants

Government had already taken those necessary measures to provide for existing anomalies in the categories of a number of workers, among them, impressed drivers and those under the Auxiliary Workers Scheme.

Casual Social Assistants make up another category of workers who are providing service to the elderly in our country and who, up till now, were considered as self-employed. This means that those who work more than 20 hours per week do not enjoy benefits such as vacation leave, sick leave and bonus.

Therefore, the time is ripe for 635 casual social assistants to be made part-time with all the pertinent rights under labour legislation. At the same time, the opportunity is being taken to introduce work practices that improve the service for the elderly so that this measure will leave the desired impact on those thousands of elderly in receipt of this service.

Financial assistance for parents with children under two years in child day care centres

One of the main objectives of the Government remains that of increasing female participation in the creation of wealth both for her own sake and for that of the country. This will be put into practice through of measures that provide support to the family.

We are launching a new subsidy scheme on payments that parents make for day care service for their small children. This scheme is projected for those working women with children under 3 years of age who are left at a licensed Child Day Care Centre. This assistance will be means tested.

Together with this scheme, Government is providing for a regulatory framework with the purpose of ensuring that the service given by these Child Day Care Centres will be of the desired standards.

In order to launch this scheme, Government is appropriating the amount of Lm100,000 for next year.

MEASURES IN FAVOUR OF TAXPAYERS

Duty on documents

In order to lessen the burden on those who wish to buy their own residence, we shall increase the value that would be subject to 3.5% duty from the current Lm20,000 to Lm30,000. In this way, a person buying property for his own residence will continue to gain another Lm150 in savings on stamp duty.

We are also going to change the present treatment in regard to property that is transferred between members of the same family.

The value for the purpose of Duty on Documents Act will now be the value of the property net of the market profit element.

While, until now, according to the appropriate legislation, the Department has always insisted that, in each case, the value of the property that would be subject to duty under the Act shall be the current market price for that property. From now on, this value will be net of the profit for the same property on the market.

Taxation on farmers that produce fruit and vegetables

Farmers will start benefiting under an assistance scheme that would guarantee good income for them. We shall also be introducing measures so that the system on tax on income, in the case of farmers producing fruit and vegetables will be simplified and reduced.

According to statistics provided by the farmers themselves in the last Census of Agriculture, it emerges that the expenses they have in their production, amounts to an average of 20% of the sale value of the product. These expenses include wages, seeds, pesticides, fuel, depreciation on machinery and ancillary costs.

As a first step in the reform in the Income Tax for the agriculture sector, as from 1 January 2003, the Inland Revenue Department will automatically start accepting these expenses for farmers as to 40% of the sale value of the products that is, twice the percentage that emerges from the Census.

Those whose expenses are below this amount would not have to produce documents and papers to the Department except those related to their sales. Those with costs exceeding the above, can calculate their profits on their actual costs as long as they can support them with receipts and other documents.

Income tax

In the budget last year we had stated that, once our targets were being met, it was opportune for the burden, that has pushed on those who had carried it mainly for these last two years would be reduced. For that year, we adjusted the tax rates on income so that a married couple making a joint declaration would save as much as Lm145 in tax.

This year we are making yet another step that goes beyond that of last year.

After discussions within MCESD, we agreed that the income tax bands would open up once more from 3 to 5.

For a married couple with a joint declaration, we are increasing the income that would be subject to tax from Lm4,100 to Lm4,300. We are increasing the current three bands to five, and therefore, on income between Lm4,301 and Lm6,000 the rate would be 15%; on income between Lm6,001 to Lm7,250 the rate would be 20%; on income between Lm7,251 and Lm8,500 the rate would be 25%; on income between Lm8,501 and Lm10,000 the rate would be 30%; and on income exceeding Lm10,000 the rate would be 35%.

For those with a separate declaration, as well as for single taxpayers, we are increasing the amount subject to tax from Lm3,000 to Lm3,100. Even here, the bands will be increased to 5. On income from Lm3,101 to Lm4,101 the rate would be 15%, on income from Lm4,101 to Lm5,000 the rate would be 20%, on income between Lm5,001 to Lm6,000 the rate would be 25%, on income between Lm6,001 and Lm6,750 the rate would be 30%, and on income exceeding Lm6,750 the rate would be 35%.

All this means that married couples with a joint declaration would save up to Lm187 in tax annually while those with a separate declaration will save up to Lm108 in tax annually.