UPDATE 1-Bulgaria plans 10 pct tax on income on bank deposits

* Tax should raise 120 mln levs

* Govt approves budget targeting 1.3 pct/GDP fiscal gap

* Analysts: will reduce incentive to save but won't hurtbank system

(Adds bank deposit tax, comment)

SOFIA, Oct 10 (Reuters) - Bulgaria plans to tax people'sincome on their bank deposits from next year as part of a budgetaimed at keeping the fiscal deficit down, Finance MinisterSimeon Djankov said.

The centre-right government aims to introduce a new, 10percent tax on income from bank deposits as of next year thatshould raise 120 million levs ($79 million).

It plans to keep income and corporate tax rates unchanged at10 percent, one of the lowest levels in the European Union.

It aims for a budget gap of 1.3 percent of gross domesticproduct, unchanged from this year, but expects economic growthof 1.9 percent in 2013, which would support its plans to raisestate pensions before a summer election.

In a bid to shield against an economic downturn, manyBulgarians have been stashing money in banks. Household depositsgrew by 13.8 percent in the year to the end of August to 33billion levs, central bank data showed.

"Bulgaria is the only country in the EU that does not taxthat income. The key is to improve equality. At present, richerpeople with bank deposits do not pay tax on that income,"Djankov told reporters.

Analysts said the new tax would reduce incentives to saveand limit banks' ability to fund the economy, although they saidit was unlikely to hurt the Balkan country's banking systemoverall, which is well-capitalised and liquid.

They welcomed the fiscal targets but criticised the cabinetfor failing to reform the inefficient pension and healthcaresystems, that could have improved spending and helped restartthe struggling economy.

"The government is likely to waste a lot of political energywith that idea for a new tax that will have a limited fiscaleffect at its best, instead of focusing on much-needed reforms,"said Georgi Angelov, economist at Sofia-based Open SocietyInstitute.

The budget plan and new tax still have to be approved byparliament, where the government has a working majority thanksto support from smaller parties. Bulgaria's economy is expectedto expand about 1.0 percent this year.($1 = 1.5167 Bulgarian levs)

(Reporting by Tsvetelia Tsolova; Editing by Sam Cage and HughLawson)


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