Italy's recently-installed coalition government hopes that its fiscal plan for next year will allow it to avoid a VAT hike, without sending national debt skyrocketing.

Here, The Local takes a look at elements of the budget which could be particularly important for foreign residents.

This article was written for Members of The Local. Read more about Membership here.

Italy's Five Star Movement-Democratic Party government said last month that the key aims of the budget were tackling tax evasion while raising enough revenue to cancel a scheduled hike in VAT, twhile its wider goal is to rein in the country's massive (and growing) deficit and jump-start its sluggish economy.

READ ALSO: Europe warns Italy over spending, but gives green light to the budget

Italian Prime Minister Giuseppe Conte in Brussels on Thursday October 17. Photo: AFP

“The bill does not stop at eliminating the [increased] VAT clause for 2020, but contains important provisions for work, the environment, investments, families and disabilities,” the government said in a statement.

No VAT increase

Cancelling a planned hike in VAT next year will leave Italy with a 110 billion euro tax gap, but the government believes it will be able to make up this loss through other measures – particularly by clamping down on tax avoidance.

Clampdown on tax-dodging

Government ministers have said a clampdown on major tax-dodging by big companies and CEOs is the focal point of the tax plans.

By going after tax evaders, they hope to bring between €800 million and €1 billion euros back into public coffers.

The government is discussing measures including longer prison terms for tax evaders as well as enforcing a three percent tax on web giants like Facebook and Google.

Italy has a tax evasion rate of about 30 percent, one of the highest in Europe, although companies and CEOs rank among the biggest tax dodgers, with an evasion rate almost 19 times higher than that of employees.

Five Star Movement (M5S) leader Luigi Di Maio stressed on Thursday that the government will be beefing up jail terms for big tax evaders, but will not be targeting small business owners.

Encouraging card payments

In a related effort to regularise Italy's enormous shadow economy and its culture of cash payments, the budget includes measures intended to incentive card payments and electronic transactions, including charges for large cash withdrawals.

READ ALSO: Italy's black market is now worth more than €200 billion

“We want to introduce incentives to push the acquisition of card readers by shop owners and traders, and talk with operators about reducing commission,” Economy Minister Roberto Gualtieri said.told the Sole 24 ore newspaper on Thursday.

The measures will cut the maximum cash payment that can be made in Italy from the current 3,000 euros down to 1,000 euros by 2022.

The government has said it would also drastically reduce the expense of electronic transactions.

Photo: AFP

Taxes on plastic, company cars and sugar

After an outcry from businesses, a planned tax on plastic has been softened and will now be limited to some types of packaging – mainly that used for food and drinks. The government is reportedly revising its plans to increase taxes on the use of company cars.

Gualtieri also said the budget bill would include a sugar tax, but that it would be “restricted to drinks and not applied to snacks” as had previously been discussed by ministers. Taxing sugary soft drinks is expected to bring in 234 million euros to state coffers next year.

Gualtieri added: “there are no interventions on petrol and there won't be a retroactive intervention on tax breaks, which has been talked about.”

Flat tax for entrepreneurs

The government has confirmed it will go ahead with the introduction of a flat 15 percent tax rate for small business owners and self-empoyed workers earning less than €65,000 annually.

Tax cuts for low-to-middle earners

A proposal to reduce the “tax wedge” for Italian employees (the difference between before-tax and after-tax wages) has also been included, at an expected cost of some three billion euros.

Deputy Economy Minister Antonio Misiani announced that cuts to the tax wedge would give each worker around 500 euros more income per year net, on average.

Extended baby onus
Italy's “baby bonus”, which has so far been reserved for families with a total income below 25,000. will become available to everyone from 2020. It's paid in monthly installments, with payments varying across the following income brackets:

• Up to €7,000: bonus of €1,920 per year (as before)
• Between €7,000 and €40,000: bonus of €1,440 (reduced)
• Over €40,000: bonus of €960 (new)

The rate applies to children born or adopted in 2020, and increases by 20 percent if a second child is born or adopted in the same year.

This is not the same as the existing bonus mamma, or “mothers' bonus”, which the government confirmed will continue next year. This is a sum of 800 euros paid to parents on the birth of each new baby.

READ ALSO: How ageing Italy plans to bump up its birth rate in 2020

Childcare payments

From 2020, payments of between €1,500 – €3,000 will also be made available per family, depending on income, to help with the cost of nursery school or babysitting.

Increased paternity leave

Mandatory paternity leave is increasing from five to seven days. The government said it aims to bring it up to ten days within the next few years, but has so far struggled to fund the scheme.

Every extra day of leave costs €10 million, meaning they'll have to allocate a total of €70 million to the measure in 2020.

Pension reform

Despite months of rumours and squabbling within the government, there will be no change to the recently-introduced “Quota 100” pension system. Italian media reports however that the scheme will not be renewed once the current three-year trial period expires in 2021.