Czech VAT increase voted out

Sat 8th Sep 2012

The position of whether a Czech 1% VAT rate increase will take place, along with other tax measures remains yet to be determined. The initial proposal to increase the reduced and standard rates to 15% and 21% respectively had been tabled during the first quarter of the year.  The average EU VAT rate is now over 21%.

While the Czech parliament lower house (Chamber of Deputies) passed the initial reading, the bill was subsequently rejected by the Senate, the upper house. Following this veto, parliamentary process required the bill to be decided again by the lower house. If it voted in favour, the bill would be passed without any further possibility of it being overturned by the Senate.

On 5 September, however, despite prime minister Petr Necas’ earlier confidence of pushing the bill through the re-vote, the Chamber of Deputies rejected it. Opposition to the tax increases not only emanated from opposition Social Democrats, but also from within Necas’ own Civil Democrats, seven of whom voted against the government. Commentators have suggested the move by the particular parliamentarians concerned was designed to pressure the prime minister for other political reasons. Necas and Finance Minister, Miroslav Kalousek continue to stoutly defend the austerity measures needed to meet a 3% GDP public finance deficit 2013 target.

On 6 September, the Czech VAT bill was re-submitted. It will now commence the whole parliamentary journey once again. This time, however, it is coupled with a confidence vote in respect of the coalition government. In terms of timing, it may be two or three months before the outcome is known. The 200 seat chamber has over the summer been a survival battle ground for the government to continue its residual two year term in office. It survived a confidence vote in July. Given its fragile position, it is simply not possible to forecast a final outcome on the VAT rate.