Sunday, June 7Sunday, June 7Hungary’s tax authority has reignited a long-running debate by proposing the reintroduction of the KATA simplified tax regime, a once-popular loophole that allowed small businesses to pay a flat monthly fee instead of progressive income tax. According to the Government Control Office (GKI), three key questions now dominate the discussion: whether the scheme can be revived without recreating the same compliance gaps that led to its 2022 abolition, how it would interact with the EU’s fiscal rules, and whether it would disproportionately benefit certain sectors over others .
The GKI’s analysis, published this week, warns that reintroducing KATA without stricter oversight could recreate the “small gate” that allowed widespread tax avoidance in sectors such as IT freelancers, taxi drivers, and online traders. Officials point to 2021 data showing that over 120,000 individuals—nearly 3% of Hungary’s self-employed workforce—opted for KATA, collectively underreporting an estimated €400 million in annual taxable income. “The original KATA was a blunt instrument,” said GKI economist Márta Varga. “Its simplicity was its appeal, but also its flaw.”
The proposal comes as Budapest faces pressure from Brussels to reduce its budget deficit, currently projected at 3.9% of GDP for 2026. EU officials have already flagged KATA-style regimes as potential state-aid violations if they disproportionately benefit domestic operators. “Any reintroduction would need to pass a compatibility test with EU state-aid rules,” confirmed a senior finance ministry official who requested anonymity.
Small business groups remain divided. The National Association of Entrepreneurs (VOSZ) has cautiously welcomed the idea, arguing that KATA could inject €1.2 billion into the economy by reducing administrative burdens. “For micro-businesses, the current system is Kafkaesque,” said VOSZ president Péter Csillag. “A flat fee would free up time to grow.” In contrast, the Tax Justice Coalition, a watchdog group, has labeled the move “a gift to the already privileged,” citing research showing that 60% of KATA beneficiaries in 2021 earned above Hungary’s median income.
Politically, the timing is delicate. Prime Minister Viktor Orbán’s government has pledged to cut taxes ahead of next year’s municipal elections, but Finance Minister Mihály Varga has ruled out a full-scale return to the old system. Instead, officials are exploring a “KATA 2.0” model with tighter caps on eligible income and mandatory digital invoicing to plug loopholes.
As the debate intensifies, economists warn that without robust safeguards, any revival risks repeating past mistakes. “The lesson of KATA is clear,” said Varga. “Good intentions are not enough. Enforcement must come first.”
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