2. History and general overview of the VAT system in Bulgaria

In 1989, when the democratic changes started in the country, Bulgaria was still without a VAT legislation.

At that time the old system of turnover tax was practiced.  This system had various drawbacks:

lack of neutrality

4 different tax rates existed (0, 2, 10 and 22%) which led to distortions in prices and in the behavior of the producers, traders and consumers.

lack of clarity

The different tax rates made it very difficult to determine the proper rate which had to be applied to a given good or service.

lack of pragmatism

All companies (even the smallest ones) were obliged to levy the tax in their deals in the same way, creating an enormous burden for the tax administration.

lack of efficiency

The system did not bring the necessary tax income.  The efficiency of the tax collection varied between 30 and 40% which was much lower than the European standards (+/- 60%).

These and other factors, for example the ambition of Bulgaria for a membership in the EU, led to a substitution of the old Turnover Tax Act with a new and modern VAT Tax Act (VATa-93) (+/- 140 articles).

The Act was published in the Bulgarian State Gazette on October 22 1993 and came in force on April 1 1994.  Some of its advantages are stated below:

more neutrality

The Bulgarian VAT has only 1 tax rate.

more clarity

The VAT Act contains clear definitions of all terms used in it.  The application of only 1 tax rate eases the work of the administration.

more pragmatism

The tax administration only has to deal with legal of physical entities, registered for VAT taxations.  Only businesses having certain turnover are obliged to register themselves.  It as been calculated that 10% of all business entities (the biggest ones) contribute for 96% of the overall tax income possible to be collected.  The registration thresholds substantially lessen the burden on the tax administration.

more efficiency

The tax credit mechanism guarantees stable tax income for the state budget due to the existing mutual control among tax payers.

closer to European standards

VAT brings the Bulgarian tax system closer to the West European standards.  The Bulgarian VATA complies (in great lines) with the norms stated in the 6th Council Directive of the EC.

modernize the Tax Administration

The imposition of the VAT can be used to modernize the Bulgarian tax administration and to improve its efficiency, which is the main element of the tax reforms in the country.