A. Introduction

The 1997 Budget is the first budget presented by the Labour party following its electoral victory last October. The Budget Speech, in reviewing the performance of the various sectors of the Maltese economy, contains 'inter alia' references to:

(i) The financial services sector - the Minister emphasised the Government's commitment to follow in the previous government's footsteps in so far as the promotion of this important sector and, hence, the encouragement of reputable business to Malta is concerned. Note was taken of the fact that in 1996: (i) there was an 11.1% increase in the registration of International Trading Companies and International Holding Companies, and (ii) several banks of international repute such as Midland Bank, Investkredit International Bank and Austrian Raifeissen Bank set up local branches or subsidiaries.

(ii) The Freeport - the Malta Freeport registered an increase of 24.7% in transhipment business, as compared to the volume of such trade registered in the first nine months of 1995.


This article highlights some of the most salient measures announced by the Minister for Economic Affairs and Finance in the 1997 Budget Speech, being


B. Fiscal Measures

1. Income Tax

The Government's objectives in this area are based upon three principal tenets:

(i) better enforcement of collection procedures;

(ii) increased efficiency in the collection of arrears of tax;

(iii) payment of outstanding refunds due to taxpayers.

Current income tax rates shall remain unchanged. The only change, if it may be so called, refers to the postponement of the Final Settlement System (a final withholding tax system applicable in relation to deductions at source from employment and pension income), due to come into force in January 1997, by a year at most so as to ensure that the requisite administrative set-up is fully operational before this system is introduced.

2. Indirect Taxation

2A. Value Added Tax

The Government has reiterated its pledge to remove VAT and to replace it with an alternative indirect tax/es. This factor notwithstanding, the Budget Speech contains very few details of the new legislation - the Minister in fact announced Government's intention to publish a White Paper shortly in order to provide all interested parties with the opportunity to discuss the Government's proposals in this regard.

The only details to be found in the Budget Speech are the following:

(I) An indication of the goals which the new system is intended to achieve, including 'inter alia' price stability and the reduction of tax evasion, a reasonably wide tax base, the minimum number possible of persons entrusted with collecting the tax and reduced administrative costs relative to such collection, and so forth.

(ii) Some features of the new tax: (i) an importation duty of 15% will replace the 15% VAT currently charged upon importation of goods from EU countries, whilst retaining the existing exemptions relating to food, medicine and education; (ii) a 5% tax shall (with effect from 1 April 1997) replace the current VAT charge on pre-booked accommodation and catering packages; (iii) all persons providing supplies of goods and/or services shall be required to be registered; (iv) all registered persons shall be obliged to issue a fiscal receipt when supplying goods or services.

2B. Excise duties and other indirect taxes

The items affected by increases in indirect taxes (and price increases, as indicated below) include the 'budget favourites' of governments world-wide, namely:

(i) Excise duty on spirits - a 10% increase in price (effective 14 January 1997).

(ii) Excise duty on cigarettes - a 10 cents increase in price per 20-cigarette packet (effective 14 January 1997).

(iii) Travelling levy - additionally to the current tax on passenger travel, a new Lm4 levy is being introduced on overseas travel tickets (effective 1 February 1997).

(iv) Car registration tax - significant increases (effective 1 February 1997) have been announced in this tax, ranging from a 3.5% increase (resulting in a 50.2% rate) in the case of cars with an engine capacity not exceeding 1300cc, up to a 40.6% increase (resulting in a 74.5% rate) levied upon cars with an engine capacity in excess of 2000cc.


C. PRICE INCREASES

(i) Car licence fees - the previous bands referring to engine capacity have been widened, so as to result in an overall increase in annual licence fees relative to the engine capacity of the motor vehicle in question. Whilst the increase is minimal for cars with a low engine capacity (e.g. the annual licence fee for cars having an engine capacity not exceeding 1300cc has been increased from Lm20 to Lm22), this is not so for cars with greater engine capacities (for instance, the highest licence fee, previously set at Lm50 for cars with an engine capacity over 2000cc, has now been increased to Lm100).

(ii) Registration and licences fees for motorised pleasure craft - revised registration and licences fees (effective 1 February 1997) range from nil fees being chargeable where the pleasure craft's engine capacity does not exceed 10 h.p., to a Lm400 registration fee and a Lm50 annual licence fee in the case of engine capacity in excess of 150 h.p.

(iii) Fuel - the announced increases in the prices of fuel reflect the international trend to favour the use of environmentally-friendly products, with higher increases being announced in the price of leaded petrol than in the price of unleaded petrol. Increases have also been announced relative to the prices of diesel and kerosene (effective 14 January 1997).

(iv) Water - increases have been announced in water rates applicable to the bottling industry, as well as to banks, parastatal corporations and certain public authorities.

(v) Postage - the postage rates have been increased by 1 cent for local postage and by 2 cents for overseas postage (effective 1 February 1997).


D. OTHER MEASURES

On the 'positive' side, so to say, the Minister also announced 'inter alia' the following measures:

1. Cost of living increases

A statutory cost of living increase of Lm1.50 per week has been granted (effective retrospectively - 1 January 1997). An additional statutory cost of living increase of Lm0.25 per week will come into effect on 1 April 1997.

2. Pensions

The above-mentioned cost of living increases shall also be extended, albeit proportionately, to pensioners. The Minister has also announced Government's intention to implement a scheme which will ensure that persons in receipt of a British service pension will also receive a full social security pension. The first phase of this scheme shall be actioned in October 1997.

3. Industrial Development Act

Reference is made to our article "Industrial Development Act, 1988".

The Minister announced Government's intention to provide greater assistance to the small industrialist and a number of measures intended to achieve this aim, including:

(i) The setting up of an Institute for the Encouragement of Small Enterprises;

(ii) Reducing the current minimum investment level of Lm100,000 for eligibility to a soft loan from the Malta Development Corporation, thus enabling industrialists investing a smaller amount of capital to qualify for such loans;

(iii) Making available smaller factory units, ranging from 50 to 365 square metres;

(iv) Reviewing the legal title under which factories are currently granted to industrialists in favour of a legal title which will be acceptable as collateral for bank loans.

THIS ARTICLE IS INTENDED TO PROVIDE GENERAL INFORMATION ON THE SUBJECT MATTER. IT IS THEREFORE NOT A SUBSTITUTE OF PROFESSIONAL ADVICE AND IS NOT TO BE ACTED UPON WITHOUT PRIOR CONSULTATION WITH SPECIALISED CONSULTANTS.