The plans must now be debated by the Senate, however the dominance of left-wing parties opposed to raising VAT on the grounds that the tax hits poorest families hardest means that the Senate may send the Bill back to the lower house. But with sufficient support for the Bill, the lower house can overrule the Senate and the plans will go to the President for approval.
“The process could go on longer as a result, but the VAT rise is likely to happen on January 1 2012,” said Jan Capek, an indirect tax partner at Ernst & Young in Prague. “The government needs money and this is the simplest and quickest way to get it.”
The government’s long-term strategy has been to create a single rate of 17.5% by 2013, by raising the lower rate further and bringing the main rate down from 20%. Recent statements by Prime Minister Petr Nečas, however, suggest he would like to harmonise the rate at 19%, though that may face stauncher opposition.
Capek is enthusiastic about the idea of a single rate, arguing that it will create a simpler system.
“You will always have goods and services where two rates will distort competition,” he said. “People argue books should be in the lower rate or our culture will suffer. But what about digital books and the internet? Where do you draw the line?”
Capek accepts that a single rate would hurt those on lower incomes, but argues that the cost of protecting the poor is high because the government would lose the substantial revenue generated by taxing the consumption of higher earners.
“VAT is the most democratic tax, the more you consume, the more you pay,” said Piet Vandendriessche, Deloitte’s global head of indirect tax.
Capek is unsure if the government will choose to raise VAT further in the near future, but the only limit is set by the EU at 25%.
“VAT is a good tax for the government,” said Capek. “It’s easy to predict and collects quickly, unlike corporate tax.”
“In a number of countries, there is a margin to increase VAT further,” said Vandendriessche.
Considering the scale of the proposed VAT rise, it is highly likely that most of the cost will be passed onto customers rather than absorbed by businesses. This could hit the retail industry.
