Assessing the Effects of Imposing VAT on the Services Provided by the Banking Sector – the Case of Bulgaria

The treatment of banking services as VAT exempted is a dominant model and common practice among EU member countries mainly due to the technical difficulties of calculating value added and applying the general credit - invoice method of VAT taxation. Not charging VAT on banking sector results in overtaxation of business customers and undertaxation of final consumers, and creates serious distortions in the economy. With this study and empirical assessment made, we seek to address some of the problems that have not been solved so far and to contribute, at least to a certain degree, to the ongoing academic debate on whether financial services need and should stay VAT exempt. By using a modified mobile-ratio method the current paper explores and assesses economic effects of including banking sector in the range of VAT taxable supplies. To identify the potential gains and losses that could have been generated under a hypothetical case of applying VAT to banking services in Bulgaria we provide a quantitative estimate for the period 2008 through 2016 at two separate levels: (1) banking system, and (2) business consumers of banking services. Finally, we estimate the volume of revenue that could has been accumulated to the State budget during the period under review if banking services were subject to VAT