Bulgaria's prime minister has confirmed that the prospect of a hike in the value-added tax (VAT) rate, which now stands at 20%, is quite likely, but assured it will be followed by a cut.

"We will come up with a decision about the increase in VAT on May 5. The moment the other anti-crisis measures start to yield results, we will begin the tax reduction,“ Boyko Borisov told the morning broadcast of the state TV channel on Thursday.

"I have always been honest with my voters,“ he added.

The VAT hike is part of a package of new austerity measures, which also include the introduction of a luxury tax, floating minority stakes in state-owned companies and a possible bond issue.

While the so-called luxury tax has been widely slammed as a purely populist measure, thanks to the VAT hike the cabinet expects to collect an additional BGN 540 M of revenues by the end of the year, which accounts for one third of the sum, needed to shore up the budget.

Politicians, analysts and trade unions however have taken a firm stand against the hike, citing a long line of negative repercussions – an increase in the inflation rate, an expansion of the grey sector, a slow-down in the economic growth, in short a boost for the impact of the crisis.

Representatives from all business sectors have cautioned that the hike in the value-added tax in Bulgaria should be a last-ditch measure, introduced only together with an overhaul in government expenditure and structural reforms.

It is also still not clear whether the tourism sector will be affected by the measure. For years on end the sector has relied on a lower, 7% value-added-tax and it is only natural to expect that the hike will hit here as well.

Bulgaria has the lowest personal and corporate income tax in the EU at 10%, which was introduced at the beginning of 2008, replacing the previous system, which combined several different tax rates - between 20 and 24%, depending on income.

The plan for a VAT increase runs counter to the promises the center-right government made after coming into office, when it voiced intentions to cut the tax from the current 20% to 18% in 2010 and by a further 2% by the end of its term.

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