— 5% VAT on food, medicines —
— Tax evasion bill goes through as Budget debate starts —
The House of Representatives passed a number of bills on Tuesday, some of which had been tabled from last April, including one which allows for the issue of covered bonds, a much-awaited instrument for the banking and financial service sectors.
This has also kick-started the week-long debate on the 2011 state budget that will see party leaders and MPs criticizing or praising the current administration’s handling of the current economic crisis.
Analysts have long argued that the covered bond law will allow Cypriot banks to tap cheaper liquidity from abroad because it will enhance their contingency liquidity tools in addition to increasing their eligible collateral with the European Central Bank.
The covered bond law also opens up alternative funding sources, broadening the potential investor base for Cypriot banks given the typically lower credit risk of covered bonds.
However, in the near term, rating agencies have said that they do not expect the covered bonds law to ease pressure on deposit rates, and, by extension, lending rates. These rates are around 200 basis points higher than in the rest of the European Union and are driven by competition from subsidiaries and branches of foreign banks and cooperative credit institutions (CCIs).
“The issue of covered bonds was jointly requested by the banks and the Central Bank of Cyprus, which may among other things contribute to the reduction of interest rates,” government spokesman Stefanos Stefanou had told reporters earlier.
Covered bonds, mostly sold by European banks, can attract higher credit ratings because they are backed by assets such as mortgages that stay on the lender’s balance sheet.
Meanwhile, parliament also approved a government bill that will see value added tax rising from zero to 5% on foodstuff and medicines, while VAT on restaurants and food delivery services will rise to 8% from January 1, earning the state some 60 mln euros.
A Ministry of Finance official said that supermarkets and food outlets have ample time to adjust their tellers before the VAT hike comes into force.
However, opposition Disy deputy leader Averof Neophytou and Socialist Edek MP Marinos Sizopoulos said that the VAT hike on medicine will not meet the government’s target of raising 10 mln euros, as the biggest buyer of pharmaceuticals is the state that purchases some 140 mln euros worth every year, while the private sector that will carry the burden of the 5% VAT hike buys some 30 mln euros worth of medicine each year, resulting in a net gain of a mere 1.5 mln euros.
Parliament also passed a set of measures to combat tax evasion that include allowing the lifting of bank confidentiality, imposing a defence tax on rents received by legal entities, prohibiting the deduction of salaries from expenses if the relative social insurance contributions have not been made which aims to tackle the problem of illegal or undeclared employment.
