Ministry report outlines future reduced VAT rates but details still to be settled

Czech consumers can look forward to having more change in their pockets after shopping trips if reported plans for the phase in of three levels of Value Added Tax come true. A preliminary document outlining the changes has already been drawn up by the finance ministry but still needs to be approved by the government by the end of the month.

Photo: Filip Jandourek

The proposed three levels of VAT and their rates were reported by the daily Mladá fronta Dnes on Wednesday. It cited a convergence report on the economy that has to be regularly dispatched to the European Commission in Brussels. The main innovation, according to the report, is a 10 percent reduced rate of tax on drugs, medicinal needs, books and magazines. The existing 15 percent lower rate of VAT, which applies to food, water, heat, and transport services, would edge down to 14 percent and current 21 percent top rate would ease to 20 percent. The Ministry of Finance says the figures are still provisional and the government has to clear them some time before the end of April.

There’s little surprise about the principle of the new low rate since it was one of the flagship proposals of the main coalition party, the Social Democrats of Prime Minister Bohuslav Sobotka. But the scope of the measure was still in doubt with Minister of Finance Andrej Babiš uncertain a few weeks ago whether newspapers and magazines would join books as the main beneficiaries as well. That question now seems, at least in a preliminary way, to have been answered. But a battle still seems to be looming over whether children’s nappies and baby food get the lowest tax treatment as well.

The phase in the new low reduced VAT rate also still appears to be up in the air. While the convergence document talks about the changes taking place from 2016, Prime Minister Sobotka told the paper he saw no reason why it could not come in as early as January 2015. Dnes says the package of reduced VAT rates will cost at least 16 billion crowns a year.

Where that money will come from is not immediately clear. The still under wraps convergence report spells out that no increases in company taxes are planned over the next three years. Special sectoral taxes on big utilities, such as telecoms and energy companies, and banks, are not mentioned at all.

The last news of those sectoral taxes were that they were still being held in reserve by the Social Democrats as a possible earner if the state coffers seemed to be falling short. But Finance Minister Babiš already appears to have struck out on his own on this one with the suggestion that at least one of the victims of such a tax, ČEZ, deliver all its net profits from last year in an exceptional dividend pay out.

Direct taxes on individuals will undergo some changes, such as the ending of a special solidarity tax on the rich and the abandonment of the so-called ‘super gross’ wage for calculating the tax damage. But, these should not result in tax hikes for any specific section of the population.

Who pays? Well, it looks like the government is banking on the ever more rosy economic growth predictions coming true with the VAT cuts helping to boost domestic demand and ease the emphasis on an export led recovery.