Income inequality and the huge value-added tax (VAT) gap are the major problems in Lithuania, Munawer Khwaja, a World Bank tax expert, has said.
“Income inequality is one of the highest in Lithuania. Another big problem is the VAT gap, which is the third highest among the EU countries. Only Italy and Greece have a bigger VAT gap, and you certainly don’t want to go in that direction,” Khwaja told reporters on November 8.
The World Bank expert also pointed out that taxation of personal income in Lithuania depended on the form of a person’s activity.
“Income, irrespective of the type of activity from which it is derived, must be taxed equally. After all, when we go to the shop to buy bread, we don’t consider whether we are buying it with the income received under an employment contract or a self-employment certificate,” Khwaja said.
“There must be the integration of all income and a progressive income tax,” he added.
Other problems identified by the World Bank include labour productivity, the low tax-to-GDP ratio (31.3% compared to the EU average of 37.6%) and the limited redistributive role of the tax system.
The World Bank suggests that Lithuania should reduce the existing VAT gap, collect more corporate and residential income tax to reduce inequality and improve tax collection.
The international body has also provided Lithuania with a tool to run simulations on how certain tax changes might affect tax collection and the country’s economy.
“An analytical tool has been developed to help us to better model tax changes and assess the implications of changes for our economy and society. Certainly, that tool will contribute to the drafting of better tax laws,” said Lithuanian Finance Minister Gintare Skaiste.
“In response to the recommendations, some changes have been drafted by the Finance Ministry, and a package of proposals has been submitted to the coalition partners for further discussion. Once we reach a political consensus, we will be able to get back to these discussions in the Seimas,” she added. (LRT/Business World Magazine)