Cabinet debates final rate of VAT

The coalition government may be considering a unified value-added tax (VAT) rate of 20 percent, up from the previous agreement of a unified 19 percent rate, according to the daily Lidové noviny (LN), as the government figures out how it will finance upcoming pension reform.

The biggest impact of a unified rate would be an immediate rise in food prices, which could dampen household spending and even slow GDP growth, analysts say.

Politicians remain divided on whether certain services will remain at a lower rate, items considered essential like food and pharmaceuticals, or whether social payments to poorer individuals and pensioners would be augmented to offset the higher tax rate. Finance Minister Miroslav Kalousek believes the latter option would be less expensive for the state. According to a statement he made to the daily Právo Feb. 14, the minister expects consumer prices to rise by percent.

"The state would offset the cost-of-living increase for the needy," he told the newspaper. "It would be much less expensive for everyone than if certain items remained at a reduced rate."

The Public Affairs party has indicated it is willing to compromise on a unified VAT rate, after initially having rejected the idea outright. More recently, party members have said they will insist on maintaining a lower rate for basic foodstuffs like bread, butter, fish and vegetables.

LN has been the sole outlet to report the possibility of a 20 percent rate, citing an anonymous source Feb. 14. As the VAT stands now, the lower rate is 10 percent for essential services and goods, the higher rate 20 percent. The coalition's original agreement would have lowered the upper rate and raised the lower one to 19 percent. With this new possibility, two categories would be exempted from the higher rate: heat and medications. Food will thus be taxed at the higher rate, which could have a significant impact on household spending.

Items that are currently taxed at the lower rate that would become more expensive include diapers, textbooks, train and bus tickets, concerts, sports games and, in a dramatic list compiled by the news site Novinky.cz, funerals, condoms and wheelchair repairs.

For items and services required by the disabled, Kalousek responded that government subsidy programs exist and would be augmented to offset higher taxes.

The state expects to gain an additional 50 billion to 60 billion Kč in annual revenues from the VAT rate change, which is expected to go into effect Jan. 1, 2012. The Cabinet expects to reach an agreement on pension reform by the end of February.

Claire Compton can be reached at
ccompton@praguepost.com