Tsunami of VAT proposals flood Czech political scene

For governments, Value Added Tax is usually one of the favourite instruments for relieving citizens of their earnings and emptying their pockets. It’s fairly easy to administer and the earnings are potentially huge. But a debate has now erupted within the Czech government and outside about selected cuts in VAT which could dent the flow of funds into state coffers.

Andrej Babiš, photo: Filip Jandourek

The big debate over VAT tax cuts was sparked by finance minister and ANO party leader Andrej Babiš himself. The minister made the surprise suggestion that the tax rate on draught beer be dropped to 10 percent from 21 percent.

Babiš’ move was aimed at compensating pubs and restaurants to some extent for his favourite flagship piece of legislation at the moment – electronic cash registers. These are mandatory tills which he hopes will banish undeclared under the table earnings across large swatches of the Czech economy.

The finance minister’s move, which would benefit some non-alcoholic drinks as well, has been costed at around 220 million crowns a year in lost tax earnings. If that’s the case, the minister still comes out a winner with the VAT clampdown supposed to bring in 18 billion crowns a year.

But the finance minister’s suggestion has prompted others to jump on the bandwagon in what now looks almost like a tsunami of tax cutting initiatives.

Bohuslav Sobotka, photo: archive of Czech Government

The most significant addition has been the main coalition government party of Social Democrat prime minister Bohuslav Sobotka. Perhaps with an eye on the Czech phrase “beer is liquid bread,” Sobotka is suggesting the lowest 10 percent VAT rate could be widened to a series of basic foodstuffs such as meat, milk, butter, and, of course, bread itself.

“We want to discuss with our collation partners whether such cuts in the VAT rate might not be possible to introduce during this electoral period.”

According to Sobotka, the list of lowest rate basic foodstuffs could be even wider.

And the opposition Civic Democrats have pushed out their tax proposals as well. They have called for the current three rate VAT system to be simplified with two reduced rates of 19 percent and 14 percent. The party says these should eventually give way to one rate of 15 percent. The ODS has also suggested that property tax and motorway charges should be swept away.

With the current parliamentary term half full or half empty – borrowing from beer glass terminology – and Senate and regional elections beckoning in the Autumn, many commentators have seen the latest tax as an early election gimmick. Similar cuts have already been offered in Slovakia ahead of general elections due at the start of March. The discussion over lower VAT rates between the Czech government coalition parties could kick off as soon as next Monday.

Photo: Czech Television

But Value Added Tax is far from a gimmick, last year earnings from the tax represented around a quarter of the total tax income of the Czech state. And the finance minister himself has declared that the Czech Republic should be targeting a balanced budget deficit within the next two or three years.