On Thursday, 11 May, the government presented the Recovery Package comprising 58 measures, which it expects to have a positive impact on the state budget balance in the period 2024-2025 in the amount of CZK 147.5 billion.
In the area of indirect taxes, there will be a substantial change, especially in VAT rates, where the government proposes to maintain the basic rate at 21%, merge the reduced rates from 10% and 15% to 12%, as well as reclassify items between rates. We provide commentary on the most interesting changes.
Big changes for books, magazines and newspapers
The professional public has welcomed the somewhat surprising proposal to reduce the VAT rate on books from 10% to 0%. Initial information suggested that the rate would be increased to 12 or 14%, which is logically enough to encourage the publication of books and thus motivate the expansion of cultural enrichment and access to education. This adjustment may be particularly useful for people on lower incomes who might not otherwise be able to afford books. A very low VAT rate on books is not unusual in the European Union, with a large number of countries having it in place. Given that this is a change of 10 percentage points, we expect the reduction in this case to be reflected in the prices on the shelves.
The proposal to reclassify newspapers from the reduced VAT rate of 10% to the standard VAT rate of 21%, while magazines are to remain at the reduced VAT rate of 12% (but here the increase is from 10% to 12%), seems almost as chaotic as the earlier decision tree for draught beer. The relevant trade organisations have already spoken out against this disparity and it is questionable how the government will take these voices into account. If the government manages to turn the proposal into a valid law, books would have a 0% VAT rate, magazines a 12% rate and news a 21% rate.
Will there be cheaper food?
Food is a necessary expense for all of us. When buying them in the Czech Republic, customers will be able to look forward to a minor correction in the VAT rate - according to the government's proposal, the VAT rate should be reduced from 15% to 12% from next year. However, based on historical experience, this change is not expected to have any significant impact on consumer prices of food. For one thing, it is not a significant enough change to affect pricing, and the VAT rate is only one of several factors that affect the final price of food. If a retailer were to reduce prices as a result of a reduction in the VAT rate, it would certainly find an argument to support maintaining the price because of increases in the input prices of other parameters that affect pricing. In the same way, retailers have not reacted in principle to the year-on-year fall in fuel prices, which account for a large part of the cost of selling goods.
The inclusion of beverages, including soft drinks, in the standard VAT rate of 21% will certainly be a big issue. This should also apply to bottled mineral, infant and spring waters.
Water, sewerage and heat supplies are likely to become more expensive (again)
EU Member States are not uniform in their approach to the application of the VAT rate when it comes to water, sewerage and heat supplies. Considerable differences can be observed across the EU. For example, Hungary applies a rate of 27%, while Malta exempts water supplies from VAT. The government proposes to keep these supplies at a reduced rate from next year, but the change from 10% to 12% could result in a slight increase in the price for final consumers.
The end of "cheap" draft beer?
In connection with the introduction of EET, the VAT rate on draught beer has been reduced from 21% to 10%. This measure has made the Czech Republic an almost absolute exception in the entire European Union in terms of the type of commodity and the reduced VAT rates. With regard to the abolition of the EET obligation, the return to the standard VAT rate seems to be a sensible step, as confirmed by other EU countries that apply the standard VAT rate to draught beer. The only exception in this sense is now Slovakia, which has introduced a VAT rate of 10% for draught beer.
As this is a big jump in the VAT rate, the impact on prices is almost certain. However, it has long been the case that draught beer is a cheap commodity. In particular, covid and its effects have pushed the price level in restaurants to a higher level, and the increase in the VAT rate will add a crown to this.
Hairdressing and barbering services
As with beer, the VAT rate for hairdressing and barbering services has been reduced from 21% to 10% due to the introduction of the EET. So, in one salon, hairdressers could charge 10% VAT on their services and beauticians 21%. The government's current proposal moves hairdressing and barbering services back to the standard VAT rate. Hairdressers would then pay the same VAT as before May 2020 again, provided they are VAT payers. Currently, the registration limit is CZK 2 million, so the change in VAT rate may not have a big budgetary impact - both from the government's and the consumer's point of view.
The government aims to simplify the VAT system by unifying the two reduced rates (15% and 10%) into one common rate of 12%. In its commentary on the Recovery Package, it also states that it wants to remove absurdities such as the application of three different VAT rates on draught beer. While this may succeed for this product, it will introduce the new absurdity of three different rates for the sale of books, newspapers and magazines. In essence, these are different media, but because of their form they would be taxed at different VAT rates. This seems a very irrational consideration and the Government will certainly face pressure to redraft this proposal.
Although neither the Ministry of Finance nor the Government has yet presented the paragraph-by-paragraph wording of the amendment to the VAT Act, it is clear from the information available that the Government intends to apply the reduced VAT rate of 12% to sensitive goods and services such as food without beverages, medicines or construction work, child car seats or funeral services. In addition to the items already discussed above, services of authors and artists, collection, transport and dumping of municipal waste, repair of shoes, leather goods and bicycles, cleaning work and firewood are to be moved to the standard VAT rate of 21%.
But tobacco and tobacco product users will also pay a premium
Compared to other EU countries, the level of excise duties on tobacco products in the Czech Republic is close to the European average. The average total tax (VAT + excise duty) for all EU countries is around €4.39, while the Czech Republic shows a slightly lower value of €3.64. Similarly, the Czech Republic's tax share of the weighted average retail selling price, at 80.1%, follows the average of all countries, which is 80.8%.
It is thus a logical step for the government to take advantage of the low sensitivity of demand to price changes in cigarettes in its search for additional revenue for the state budget. Even if the increase in excise duty makes a packet of cigarettes more expensive for end users by, say, 10 to 15%, overall sales will not, in principle, be affected. If it does, it will have a positive impact on the health of the population.
The Treasury has announced that it wants the government's consolidation package to be in place and effective by January 2024. The Finance Minister has said that he wants the proposals to pass their first reading before the parliamentary recess. We will therefore see very soon what changes can be pushed through to the package. I am sure he is continuing to keep an eye on us.
