Indirect taxes will allow the state to increase revenues
According to the draft budget, more than 55% of state tax revenue will come from VAT and other indirect taxes in 2025.
What?
The draft budget presented last week estimates that state tax revenue will reach 63.3 billion euros in 2025, more than 55% of which will come from Value Added Tax (VAT) and other indirect taxes.
“Tax revenue in 2025 is expected to grow by 2 277.1 million euros (+3.7%) compared to the estimated revenue for 2024, totalling 63 337.9 million euros. This increase is due both to the evolution of direct taxes (-305.9 million euros) and indirect taxes +2583 million euros,” reads the Ministry of Finance’s report accompanying the SB2025 proposal.
All things considered, VAT and other indirect taxes are expected to account for 55.8% of the €63.3 billion generated by the State’s tax system.
In fact, revenue from indirect taxes is projected to grow by 7.9%, while revenue from direct taxes (primarily personal income tax and corporate tax) is expected to decrease by 1.1%.
Tell me more
Regarding VAT, the government anticipates that revenue from this tax on consumer goods will increase by 6.4% to €25.6 billion in 2025, compared to the estimate for 2024.
“The growth in VAT revenue reflects both an increase in private consumption (2%) and an expected rise in consumer prices (2.3%),” highlights the 2025 State Budget report.
Energy
The team led by Finance Minister Miranda Sarmento estimates that the tax on petroleum and energy products (ISP) will generate an additional €752.5 million in 2025 compared to the previous year, representing a 21.9% increase in ISP revenue.
The projected increase in ISP “stems from the expected growth in private consumption alongside measures implemented by the government.”
What are these measures? They include the end of ISP exemptions on advanced biofuels, the gradual unfreezing of the carbon tax, and the discontinuation of the special professional diesel mechanism, which will allow the State to collect an additional €650 million in ISP revenue.
Furthermore, up to €10 million of the ISP revenue from colored diesel will be allocated to finance the national contributions for the PDR (Rural Development Program) 2020, PEPAC (Strategic Plan for the Common Agricultural Policy) 2023-2027, Mar 2020, and Mar 2030 programs.
These funds will preferably support projects aimed at family farming and traditional coastal fishing, in proportion to the amounts of European funding.
Tobacco
Revenue from the tobacco consumption tax (IT) is expected to grow by 4%, reaching €1.6372 billion, “as a result of the anticipated 2% increase in private consumption” (it’s not clear why the Government believe that there will be this increase in 2025).
However, there is a new provision: any revenue that exceeds €1,466,000,000 will be “allocated to the promotion of health and the sustainability of the SNS [National Health Service], managed by ACSS, I.P. [Central Administration of the Health System], and to the regional health services of the Autonomous Regions of Madeira and the Azores, according to the region where the consumption occurs.”
Alcoholic beverages
The State’s tax system will also seek revenue from alcoholic beverages, specifically through the IABA (tax on alcohol and alcoholic beverages), which is expected to generate €364.7 million in 2025, an increase of 4.7% compared to the expected revenue for 2024.
Cars
Regarding the vehicle tax (ISV) and the single circulation tax (IUC), the Government estimates that ISV revenue will grow by 2.1%, reaching €468 million, while projected IUC revenue is expected to increase by 4.7%, reaching €535 million in the coming year.
Property
Once again, the Government projects increased revenue based on the “anticipated rise in private consumption (2%).” It is worth noting that the Government will maintain the additional IUC rate, applicable to diesel vehicles in categories A and B.
Revenue from the stamp duty (IS) is expected to increase by €110.9 million in 2025 (+5.2%), reaching €2.2 billion.
Other indirect taxes
The Government will maintain in force the Extraordinary Contribution on the Pharmaceutical Industry (CEIF), the Extraordinary Contribution on Suppliers to the National Health Service Medical Devices Industry (CEFID), and the Audiovisual Contribution (CAV).
“In 2025, the revenue from these taxes is expected to amount to 290.1 million euros, representing an increase of 25.6% compared to the estimated execution for 2024,” according to the report on the draft budget.
it seems that most of the increase in tax revenue comes from consumption taxes. Are these driven by a growth in consumption, or a change in the actual tax rate? I understand the increases for energy and tobacco, but I'm less clear on what drives the increased revenue for the other categories.