Started on March 15 to be valid through the end of September, reductions in the value-added tax (KDV) and private consumption tax (ÖTV) for certain sectors proved successful in keeping troubles at bay to some extent. However, following the end of the tax cuts, the sectors found it highly difficult to maintain the progress they had enjoyed throughout the past months. The auto market, which had sustained huge losses since the beginning of the crisis, for instance, saw an almost 40 percent decrease soon after the end of incentives.
On March 15 the government took the first step and introduced reductions in the KDV and the ÖTV for automotives, real estate and home appliances for a three-month period as part of a fourth stimulus package. The sectors to receive the incentive support first were particularly chosen among those in which stock had piled up dramatically due to shrinking demand. The initial target of the measures, hence, was to ensure that the companies depleted, to an extent, the excess stock that had accumulated in their inventories. This would also mean that the market would enjoy an anticipated improvement with increasing sales. A few days before the end of March, the government introduced the next phase of the recovery program with a fifth package, this time extending help to other sectors including furniture, electronics and real estate for the next three months.
Circumstances call for support
The government was not so enthusiastic about extending the incentives but had to change its mind only after it realized that things could actually get worse unless it did the opposite. Before the expiration of the incentives, sector representatives raised concerns that the incentives should be extended; otherwise, everybody should to be ready for the worst-case scenario. While the markets were still being battered by the destructive forces of the crisis, decreased demand, lower consumer confidence and increasing unemployment were putting more of a burden on the shoulders of the non-financial sector. In anticipation of a swift recovery in the markets, the government decided to extend tax reductions for an additional three months, on June 15. The term expired at the end of September, and there was no second extension. Such was not, however, the best of news for sectors that were happy with a substantial recovery following increased demand. It was then that the fears of a relapse into the old days became more obvious. The furniture industry has seen the benefit of the KDV cuts, with TL 5 billion in turnover in just six-and-a-half months. It was one of the sectors that enjoyed the most benefit from the incentives. However, the sector saw a 30 percent decline in sales in the two months following the end of tax incentives over the previous period. The electronics sector also saw a noticeable increase in sales, particularly in the summer season. In the April-June period desktop and laptop computer sales in Turkey, for instance, were up 55 percent over the same months of 2008 thanks to incentives. The white goods sector, which had experienced a decline in production since 2007, was another one that enjoyed the benefits of the tax cuts, where the incentives produced growth of 9 percent in production in the sector as well as an 18 percent increase in revenues during the March-June period of 2009 compared to the same period of the previous year.
As in global markets, the Turkish automotive industry was also badly hit by the crisis. Tax cuts saved the situation in the auto market to some extent. The sector enjoyed a 3.4 percent increase in sales in the first 10 months of 2009 over the same months of 2008; however, motor vehicle production declined by 44.7 percent in first half of 2009 over the same period of 2008, inevitable because of shrinking exports and decreased demand. As for the state, it had sustained a noticeable loss in its ÖTV revenue following the tax reductions, while KDV revenues increased, recent data from the Finance Ministry revealed. The state enjoyed a considerable 15.97 percent rise in KDV revenue in the January-August period of this year, while ÖTV from motor vehicles decreased by 32.24 percent and durable goods fell 28.18 percent in the same period.
Looking at the current picture, tax incentives were successful in rejuvenating domestic demand during the time of crisis, but problems still prevail in many sectors, with unemployment the most severe. A permanent and effective solution for unemployment in Turkey seems to be possible only when global markets recover, bearing in mind that the crisis has triggered a widespread loss of jobs, and it will take a long time before the problem can be addressed.
