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12° Nicosia,
14 July, 2024
 

0% VAT rate, the second round

Exploring next steps in reducing taxes on essential goods

Maria Eracleous

Maria Eracleous

Almost two weeks after the zeroing of the tax rate on seven products (bread, eggs, milk, baby diapers, baby food, feminine hygiene products, and adult diapers), the Ministry of Finance and the Ministry of Commerce are in discussions regarding the next list of products that will have a low or reduced tax rate. Information suggests that there may be developments and possible announcements on the matter within June. However, the timeline depends not only on the government's decision but also on the European Commission, which needs to give its approval if the selected products do not fall into the low-tax category and are not considered essential goods. The prevailing scenario is that the chosen products will have a 5% tax rate, such as dairy products, sugar, and coffee. The suggestion of reducing VAT on products such as pasta, rice, cleaning products, and personal hygiene items has also been raised, although the likelihood of selecting the latter two categories of products is remote. The Ministry of Finance emphasizes that the new product package should consist of items that have experienced significant price increases in the past year, in order to be incorporated into a decree. In other words, they should have a low tax rate and be considered essential goods. Otherwise, the government's decision would have to pass through the European Commission. There is also the possibility of reducing the tax rate rather than zeroing it out, especially if the products have a high VAT rate.

As stated in the text of the relevant directive, goods and services eligible for reduced rates should aim to benefit the final consumer and pursue objectives of general interest. In order to avoid unnecessary complexity and the resulting increase in costs for businesses, especially concerning intra-community trade, once member states choose certain goods and services as specified, reduced rates are expected to be applied throughout the entire commercial chain.

Within June

Initially, the measure was implemented through a Ministerial Decree without the need for consultation to secure the agreement of the EU, both due to the level of the tax rate and the fact that it concerned essential goods. The cost for this initial package of zero tax rate, for the period from May to the end of October, amounts to 11 million euros. According to the Ministry of Finance, this is a manageable cost, while it is emphasized that in order to expand the measure to more products, the fiscal cost must also be manageable. Sources report to "K" that the goal is to expand the measure in the near future, and there may be announcements for a new list of products with reduced VAT, possibly within June.

Inflation

Such a measure is expected to have a positive impact on reducing inflation, which is expected to be reflected next month. Already, the measure has a positive impact on the consumer's wallet, and the cases of complaints regarding price increases or the maintenance of prices instead of a decrease after the implementation of the measure are few, compared to the prevailing market perception. The Association of Supermarkets reported to "K" that there has been an increase in foot traffic after the implementation of the measure, and what can be inferred from market reports is that the measure has relieved consumers' pockets.

This specific measure is an intermediate step towards mitigating inflation, as stated by the Ministry of Commerce. From the very beginning, the Minister of Energy set the goal of reducing energy costs for businesses, and in the meantime, they are proceeding with short-term solutions that yield immediate results.

[This article was translated from its Greek original]

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Cyprus  |  economy  |  consumer  |  VAT

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