WHILE the ruling Smer party of Prime Minister Robert Fico had criticised the temporary increase of value added tax (VAT) to 20 percent by the previous government of Iveta Radičová as one of measures to consolidate public finances, it has declined to return it to 19 percent even though conditions for doing so have been met. The Slovak parliament, in which Smer holds the majority, adopted on July 8 a revision to the VAT Act, removing from it the regulation based on which the VAT drops from 20 percent back to 19 percent when the general government deficit decreases below 3 percent. Based on statistics of Eurostat, the deficit was 2.77 percent in 2013, the TASR newswire wrote.

“IMF recommendations explicitly mention keeping the VAT rate at the current level,” Ladislav Kamenický, a MP for Smer and co-author of the revision said, as cited by TASR. “Maintaining VAT revenues, along with increased success of tax collection, makes up a significant part of the measures that are essential for achieving the objectives for 2015.”

A reduction of the VAT rate to 19 percent would mean a drop in tax revenues by €236 million in 2015.
“At the same time, it cannot be expected that a VAT-rate reduction would have a downward effect on prices, but that it would partially translate into higher profit margins for retailers,” the revision prepared by Kamenický and Jaroslav Demian, an MP for Smer, reads.

The Financial Policy Institute at the Finance Ministry has calculated that the reduction of the VAT rate by 1 percentage point would cause a decrease of the price level by 0.36 percent, while the same increase would increase the price level by as much as 0.84 percent.

Preserving the 20-percent VAT rate brought a wave of criticism from the opposition. It said that Smer goes against its pre-election rhetoric when members slammed the temporary VAT hike as a measure that will especially hit low income citizens via higher prices of basic goods and services. The opposition also does not like that the government implemented a change as important as the adjustment of the VAT rate through a simple amending proposal submitted by parliamentary deputies.