The ‘shadow economy’ in Cyprus accounts for about a quarter of Gross Domestic Product, the finance ministry said on Tuesday as it stressed that the upcoming overhaul of the tax system is designed to enhance equal treatment of taxpayers while attracting foreign investment.

In a statement, the finance ministry said the consultation period for the tax reform is ongoing and has been extended to September 10 to allow all stakeholders to give their input.

“This government”, read the statement, “remains committed to the philosophy that the tax system is a tool to ensure state revenue, but more importantly it must be a stable and transparent system so it can continue to attract foreign investment, boost entrepreneurship and avail of the mechanisms for an equitable and fair distribution of the benefits to all taxpayers”.

Finance Minister Makis Keravnos plans to soon have a joint meeting with the heads or representatives of all the parliamentary parties to discuss the issue.

The main driver behind the tax reform is to ease the tax burden on the middle class and to crack down on tax evasion and tax avoidance – which together form what is called the ‘shadow economy’ making up almost 25 per cent of GDP.

The ministry expressed “surprise” at the fact that some quarters appear to oppose proposed measures to clamp down on tax evasion.

“Let them explain to the people what exactly it is that they counter-propose, and what it is that they represent.”

The ministry said the government “remains open to constructive suggestions for any corrections that may improve the proposed plan as well as the bills to be tabled to parliament”.

In the meantime, both the finance minister and the tax commissioner continue to hold one-on-one meetings with stakeholders.

Experts have verified that the tax reform’s fundamental clauses are consistent with the EU acquis, the statement added.

In close collaboration with the Economic Research Centre at the University of Cyprus, the government is preparing a sweeping tax overhaul that will broaden the tax base, toughen enforcement and ease the burden on households and businesses.

One of the ideas under consideration would allow tax authorities to seal off businesses that repeatedly fail to issue legal receipts or invoices.

Tax authorities could temporarily shutter shops or companies if they are caught violating the law on receipts, particularly after repeated offences.

Another idea resurfacing is the criminalisation of non-payment of income tax.

The government is also considering tougher penalties on tax violators. Currently, individuals and companies alike failing to file a tax return face a fine of just €100 – an amount deemed negligible, especially for corporate offenders.

The draft bills include an increase in the personal tax-free threshold to €20,500, up from €19,500 now. Income brackets will be revised, shifting the highest tax rate of 35 per cent to income over €80,000.

Another proposal is an increase in the corporate tax rate from 12.5 per cent to 15 per cent.

The stated aim of the overhaul is to strike a balance between revenue collection and growth, strengthening competitiveness while also restoring fairness.

The new tax system is scheduled to be implemented next year.