“VAT Can Be Reduced Only After Budgetary Spending Cuts”

Total Croatia News

ZAGREB, January 23, 2018 – Room to reduce the standard VAT rate of 25% in Croatia can be created only if state spending is rationalised in the long run, and even then it is possibly wiser to reduce labour and capital taxes, reads a Public Finance Institute (IJF) publication entitled “Proposals for New VAT Rates in the EU”.

The author of the publication, Marina Kesner-Škreb, says that VAT revenues constitute the heftiest portion of budget revenues (45 billion kuna or 63% of budget revenues in 2016), and that even a small change would cause major changes in those revenues.

“Room to reduce the standard VAT rate will be created only if long-term and sustainable rationalisation of state spending is achieved. But even then it would possibly be wiser to reduce the ‘harmful’ taxation of labour and capital, thus encouraging growth and employment,” says Kesner-Škreb.

She recalled that the European Commission on 18 January proposed introducing a new VAT system giving member-states more autonomy while simplifying the current VAT system.

The new proposal for the system of VAT, which is considered one of the least harmful ways of taxation and especially ‘friendly’ towards economic growth, envisages a standard rate of minimum 15% and gives member-states the possibility to introduce also two separate, lower rates of between 5% and the standard rate; one zero rate; and an additional lower rate of between 0% and the lower rates.

The EU’s current complex list of products and services to which lower rates may be applied would be abolished and replaced by a new, so-called negative list, which would cover products such as weapons, alcoholic drinks, gambling, tobacco products etc. and those products would always have to be taxed by the standard rate.

One of the changes is that the average weighted VAT rate would have to amount to at least 12% in order to secure sufficient funds in the member states’ and EU’s budgets. The new regime also envisages continuing the use of all rates different than the standard rate.

The bill on the new VAT regime will be submitted to the European Parliament and the European Economic and Social Committee for consultation and to the Council for adoption.

Standard VAT rates in the EU range from 17% in Luxembourg to 27% in Hungary, with most countries using standard rates of between 20% and 24%. Together with Denmark, Sweden and Hungary, Croatia is at the very top in that regard, says Kesner-Škreb.

Croatia applies lower VAT rates, of 5% and 13%, to 20 groups of products and services, and those rates do not depart significantly from rates applicable in other EU member-countries.

In 2014, the share of VAT in GDP in Croatia was 12.5%, which is much higher than the EU average, which in 2015 was 7.8% of GDP, and the highest in all EU members.

The flexibility in setting VAT rates as proposed by the European Commission will contribute to adjusting VAT in Croatia to domestic economic priorities in the best possible way, says Kesner-Škreb.


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