New VAT plan just as damaging, analysts say

Prague, Oct 16 (CTK) - The compromise tax proposal of Prime Minister Petr Necas, according to which only the lower VAT rate should increase as of 2013, will raise inflation by 0.3 percentage points, analysts said.

Spending of an average Czech household will thus grow by some Kc80 a month, said Patria Finance analyst David Marek.

However, analysts believe that the current arguments about VAT rates and changes in taxes in general every year are not good for the economy.

The government's original plans counted on a one percentage point increase in both VAT rates. Some deputies of the government's Civic Democratic Party (ODS) were among those opposing the plan.

This variant, as Marek said, would raise inflation by 0.8 percentage point and household spending by some Kc190 a month.

Necas's proposal reckons with keeping the basic VAT rate at 20 percent and raising the lower VAT rate from 14 to 15 percent. The compromise proposal will strip the state budget of Kc10bn in 2013 against the original proposals.

"It has shown that raising of taxes causes freezing of consumer demand and the same or even lower tax collection. It is basically the same whether VAT will be at 19, 20 or 21 percent, the margin will adjust to it and so will clients with some delay. Uncertainty caused by the tax changes, however, has an extraordinarily negative impact on the economy," Next Finance analyst Marketa Sichtarova warned.

Miroslav Sevcik, dean of the Faculty of Economics at Prague's University of Economics, also believes that now is not the right time to change tax rates.

"Despite the increase in the lower rate from 10 to 14 percent last year, the total shortfall in VAT collection within public budgets for January-September is nearly Kc30bn against expectations," he pointed out.

Moreover, it is important for the stability of the economy that the set parametres be not changed too often, he added.

UniCredit Bank analyst Pavel Sobisek is also of the opinion that business uncertainty concerning taxes harms the economy a lot. The proposal for raising only the lower VAT rate is one of the possible solutions but it at the same time has to solve the hypothetical shortfall of roughly Kc10bn, he said.

"If the savings are found, the solution would be better from the macroeconomic point of view than raising both rates. Inflation in such case would be raised by the VAT changes by only some 0.3 percent. This, with respect to the normal fluctuations in food prices, would be nearly unnoticeable for consumers," he noted.

"It is high time for companies and people to learn what tax rates will be in force next year. It would be ideal to be sure about it even a few years ahead. The situation of a permanent tax reform is not good for the economy," Marek added.

The proposed changes will mean another cut in spending for many households, said Martin Divis of PwC CR. For VAT payers in general, the change is neutral because VAT is not a cost for them but only an item.

"Raising of the lower VAT rate will burden in particular the area of services demanding on work and construction," he added.

If no variant of the proposed VAT changes is approved, single VAT rate at 17.5 percent will be valid as of next year. It has been approved already earlier and the current proposals are to change it.

Impacts of individual VAT variants for 2013:

Variants Total VAT collection (Kc bn) Additional increase in VAT collection (Kc bn) Per capita change of household spending (Kc) Change in monthly household spending (Kc) Impact on inflation (percentage point)
This yr - 14 and 20 pct 290.3 - 0 0 0.0
Original plan at 17.5 pct 289.2 - 1.1 -6 -12 0.0
Revised plan at 15 and 21 pct 306.8 16.5 83 186 0.8
Compromise at 15 and 20 pct 297 6.7 35 78 0.3

Source: Patria Finance