The government is in the process of raising the penalties for not issuing VAT receipts “drastically”, Parliamentary Secretary Tonio Fenech announced yesterday.

Answering questions during a press conference held at the Inland Revenue Department, Mr Fenech said the current Lm100 penalty is clearly not serving its purpose as a deterrent even though it is raised to Lm200 for second time offenders. “We are currently in the process of increasing the penalties drastically,” he said.

The press conference was called to announce that some 30,000 pensioners and students whose tax contributions are nil or negligible will not be required to fill in tax returns as from this year. However, Mr Fenech was bombarded with questions by the journalists present regarding the status of tax compliance in Malta and the measures currently being taken to curb what the parliamentary secretary himself described as an obvious problem.

In fact, asked whether there was an estimate of the rate of tax compliance in Malta, Mr Fenech revealed that around 35 per cent of due taxes are not being paid.

“The figure given is obviously a rough estimate…an impression, because it is ultimately impossible to quantify tax evasion exactly. However, we estimate that the rate of tax compliance stands at some 65 per cent,” he said.

On the other hand, the 30,000 or so pensioners and students which will be exempt from filling their tax return are deemed to be low risk with no or negligible taxes due to the government. The original idea included those earning minimum wage or thereabouts, which would have brought the figure up to 50,000. However, it was opted to introduce the scheme for pensioners and students since the government felt it would be sending out the wrong message to the 20,000 on minimum wage.

Those eligible will be receiving a note from the department shortly.

“We know that there are some who declare they earn minimum wage when in fact they earn more since they have an odd job on the side. We did not want these people to interpret their exemption from the tax return as a message from the government that from now on they have nothing to do with the system and that the government is happy with things as they are.”

Asked whether he thought the figure of 606 self-employed declaring they earn less than Lm16,000 per year was realistic – a figure which emerged from a recent parliamentary question – Mr Fenech said there was obviously a problem. He pointed out that this was the main aim behind the government’s decision to introduce the income benchmarking system.

“However,” he continued, “in a country which upholds human rights and civil liberties it is not a snap and go issue. You cannot impose on people…it’s often a lengthy process.”

So far, the Tax Compliance Unit has tried to reach a benchmarking agreement with mechanics, panel beaters and doctors. However, the success rate with the first two sectors was very low and only 10 to 15 per cent submitted their tax projection for the next three years.

The exercise was more successful with general practitioners. In fact, out of 200 some 160 have reached a benchmarking agreement. The unit is currently in the process of starting talks with medical specialists. However, this category is more problematic to benchmark given the marked differences between different practitioners and their respective field of specialisation.

When an agreement is not reached, the process is less plain-sailing since the TCU has to investigate each and every case it deems suspicious.

The process ties in with the period of grace the government has given entrepreneurs in order to regularise their position in terms of VAT returns. “Now we have given everyone a chance to get their act together. However, if after the deadline there are some who persist, we will take legal action. I hope no organisation will accuse us of wanting to put people in jail. We simply cannot not take action,” he insisted.

Over the past years, the government has embarked on a series of reforms which were aimed at giving the TCU, the IRD and other institutions responsible for tax collection, more executive powers.

The TCU, for example, now has the power to ask for information from third parties when it deems that a firm or an individual are not paying their dues or at least not the full extent. Mentioning the Maritime Authority as an example, he said that the TCU now can verify whether a person has a yacht registered in his or her name with the authority. “If that same person is declaring earnings in the Lm5,000 per year range and in addition to a yacht has a number of cars and a large house, then one can conclude that there is something seriously wrong,” he added.

The TCU was established in order to investigate companies but is also venturing on personal investigations since the benchmarking system was introduced, he explained. When asked to quantify the cases investigated successfully by the TCU, Mr Fenech said he did not have such statistics at hand. However, he added, the success rate of the unit cannot be easily measured since various cases involve lengthy dispute processes.

Pressed for figures, Mr Fenech said the TCU investigates roughly some 2,000 cases each year. He stressed that the figure is substantial when one considers the unit is made up of a 25-member team.

Furthermore, over the past two years the government has seen a considerable increment in the income tax collected (Lm15 million in 2003 over 2002 and Lm5 million in 2004 over 2003) which obviously is not wholly due to the increase in the rate of compliance.

The IRD is also being efficient in its payments, Mr Fenech explained. In fact, all those who were owed refunds by the government for 2004 have been paid in January and February. The payments totalled Lm1.8 million.

However, there are still some 8,000 cases pending in which the government is owed or owes money. These are pertinent to the period before the reform and cannot be easily dismissed since many of these cases are disputed and, at times, end up in court.