On Thursday, 11 June, Lithuania's Constitutional Court ruled that legal regulations that distribute personal income tax (PIT) to municipal budgets contravened the Constitution. Only 40 percent of PIT used to be transferred to Vilnius City Municipality based on these regulations. The Vilnius authorities have lauded the ruling which will allow it to claim more tax money from the central government.
Kęstutis Lisauskas
© DELFI / Audrius Solominas

If the share of PIT allocated to Vilnius is increased, then new taxes may be introduced, says Kęstutis Lisauskas, Business Tax Services Leader for Central and Southeast Europe at EY and Chairman of the Lithuanian Investors' Forum Tax Committee. The widely unpopular motor vehicle tax could be one of the new levies.

According to Lisauskas, it is difficult to reasonably explain why Vilnius was allocated such a small share of PIT, or why PIT allocated to Kaunas and Klaipėda differed so much. The Constitutional Court's judgement should provide stimulus for Parliament to justify the principles of PIT distribution based on objective economic criteria. This means that disparity of PIT share between cities should decrease. Vilnius is more likely to receive a bigger share of collected PIT. But it is hard to imagine that PIT would be reduced for other cities. The increase of PIT share for Vilnius should help the deal with Vilnius City Municipality's debt. Lisauskas has welcomed this long-needed move.

Nevertheless, the tax expert has raised a question from what sources the state budget would compensate its losses due to PIT increase for Vilnius and possibly for Klaipėda. He hopes the situation will not force Parliament's majority to support MP Algirdas Sysas' proposal to introduce progressive taxation.

According to Lisauskas, it would be very harmful to increase PIT tariff, and especially introduce progressive tariff, while the burden of social insurance contributions has not been reduced. Because of this many people would try to avoid growing tax burden by turning to the underground economy or replacing income from work with other kind of income, etc.

The expert said that, on the other hand, the pressure on the state budget would silence proponents of value added tax (VAT) reduction for heating as well as other VAT exemptions.

As reported, the Constitutional Court ruled that legal regulation of allocation of personal income tax (PIT) to municipal budgets contravened the Constitution.

The Constitutional Court stated that clear criteria have not been established on how to compare financial situation of those municipalities that allocate their portion of PIT and those that receive it. Next, it has not been estimated if financial situation of donor municipalities could not turn worse than financial situation of receiving municipalities. As these criteria have not been established, it is impossible to objectively evaluate municipalities' income needs and their ability to support financially weaker municipalities.

The Court believes that there are no legal criteria that could be applied to calculate which municipalities should be allocated less than 100 percent of PIT. Therefore, preconditions have been created for municipalities that did not receive 100 percent of PIT to end up in a considerably worse financial situation than municipalities that did receive 100 percent of PIT.

Based on the Law on Approval of Financial Indicators of the State Budget and Municipal Budgets of 2015, the share of PIT allocated to all municipal budgets stands at 72.80 percent. The share of PIT allocated to Vilnius City Municipality is 48 percent, Kaunas - 94 percent, Klaipeda - 86 percent, whereas all the rest municipalities are allocated 100 percent of PIT collected in their territories.

The appeal to the Constitutional Court was submitted by a group of 30 MPs. According to them, the interests of Vilnius' residents have suffered the most, as well as the image of the Lithuanian capital. The Constitutional Court's ruling will enter into force from January 2016.

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