The planned rise was first announced in September ahead of the 2012 budget which aims to add HUF1 trillion ($4.75 billion) to government coffers to meet its target of having a maximum deficit of 2.5% of GDP.
The change has attracted attention as it would take the rate above the 25% EU standard limit. Despite the potential controversy, however, the Bill met with little opposition, with only 72 votes against and 232 in favour.
György Matolcsy, the economic minister, said that the VAT Directive would not prevent the increase.
A closer reading of the VAT Directive and its several updates lend credence to his confidence. There is a lower limit set for the standard rate of VAT at 15%, but there is no upper limit explicitly set for the standard rate that member states may use. Matt Ayton of the TMF group noted the lower restrictions but commented, “I can’t find a cap on how high it can go.”
The 25% figure which has been thought the upper limit is referenced in a 2010 proposal for a Council Directive to amend the directive on a common system of VAT. The provisions therein make clear that the Commission viewed a minimum level of 15% as significant for harmonisation.
However, recital six of the proposal suggests that the 25% upper limit is simply a matter of convenience. The proposal states that this level was chosen only because of “the rates applied in practice in member states, where standard rates have always varied between 15% and 25%”.
The proposal did not lead to any upper limit being inserted in the latest amendment to the VAT Directive. There does not appear to be an upper limit on member states’ VAT rates; the figure of 25% was derived from those rates in practice.
It seems that the Hungarian government can raise the VAT rate in an effort to control the nation’s budget deficit without the VAT Directive presenting any problems.
However, Ayton commented that the rise will pose problems for many businesses in Hungary. In particular, companies selling to consumers are expected to be hit hard.
“From the point of view of our clients, many of whom are in online consumer sales, if you have one price no matter where you’re selling to, the rise in VAT just means your margin goes down and down. And it doesn’t look good to have a different price for one country because the VAT rate there is higher,” said Ayton.
This is the second two percentage point increase introduced in Hungary in the last three years. The rate was raised from 23% to 25% in 2009.
