Confusion surrounding VAT rate change vexing Czech firms

Following a vote in the lower house, the Czech Republic’s two VAT rates should increase on January 1. However, if the president – a critic of the change – doesn’t play ball, the bill cannot come into effect, and, with very few working days left before the New Year, that uncertainty represents a major headache for Czech businesses.

Photo: archive of ČRo 7 - Radio Prague

Business people around the Czech Republic are keeping a very close eye on the country’s president, Václav Klaus. It now depends on him whether a government bill passed on Wednesday increasing the basic value-added tax rate from 14 to 15 percent and the higher rate from 20 to 21 percent comes into effect on January 1.

Last year a bill setting a unified VAT rate of 17.5 percent from the start of 2013 was passed. But then the government changed its mind, deciding to raise the two current rates instead. It wanted to push that through in September. However, it faced opposition from rebel MPs at the time, leading to the new bill being approved a mere 11 days before it should enter force.

The president has 15 days to decide whether to sign it, veto it or “send it forward” (a move tantamount to agreement). However, Mr. Klaus says the sales tax hikes are “incomprehensible” and likely to put a brake on economic growth.

Photo: archive of ČRo 7 - Radio Prague

If he makes use of the entire 15-day period, the “abandoned” 17.5 percent single rate will apply from the New Year – only until the lower house rectifies the situation, but long enough to cause unprecedented chaos. Meanwhile, Czech firms have no idea what is going to happen.

Pavla Břečková is a member of the board of the Association of Small and Medium-Sized Enterprises.

“On the consumer market it’s a genuinely big problem. It involves repricing goods, either in terms of price tags or system repricing. On the industrial market it’s less of a problem, and mainly concerns software settings, but that too would have to be done over Christmas. In any case, it means higher expenditure on administration.”

The prime minister, Petr Nečas, has expressed regret over the current mess.

“It’s not as if the situation gives us any joy, quite the opposite. We’re aware that the situation brings problems and that the setting of VAT rates complicates the lives of business people. I can only express my regret and apologise to those in the business sphere that we’re complicating their lives at the end of the year.”

Petr Nečas, photo: CTK

The cabinet’s own lives are also being potentially complicated, as next year’s budget has been calculated on the basis of VAT rates of 15 and 21 percent.

Mr. Nečas says he is convinced Mr. Klaus knows what is at risk, and – despite the president’s misgivings – it is hard to imagine that he will prevent the legislation entering the statute books by the end of 2012. However, until he makes a move, both business people and ministers will be on tenterhooks.