Taxes hitting Greece’s healthiest sectors

The government?s drive to reduce the public deficit mainly by way of boosting revenues, that is by raising taxes, and its persistence despite the obvious ineffectiveness of the option, is causing serious problems in the real economy. Indeed, the latest tax measures are hitting the most outward-looking sectors of the economy — precisely those that the government wishes to strengthen.

A special consumption tax on natural gas came into force on September 1. Despite assurances to the contrary, it was also imposed on gas used for electricity production. The result has been a steep rise in production costs in the cement and metallurgy industries — two sectors with a large share in exports. The only ones who gained from this arrangement were the gas importers who, having bought cheap future contracts, sold at a considerable profit. And so in an economy hit by recession, you have the paradox of a policy that undermines exports — which bolster the gross domestic product — and favors imports.

The picture in the tourism industry — a major currency earner — is similar. The VAT hike in catering services dents their competitiveness. As a result, the gains resulting from a variety of factors, including a VAT cut in hotel services, are at risk of being canceled out next year.

Experience has shown that tax hikes do not increase public revenues, not just because collection is difficult but because they ultimately reduce taxable turnover.

A characteristic example is the special levy on enterprises. In 2009 it amounted to 581 million euros on the previous year?s profits. In 2010, they paid 532 million, and this year the government is projected to collect no more than 350 million due to the recession.

The imposition of the special consumption tax on gas was like a coup de grace on the energy-consuming industries seeking to boost exports. The wholesale cost of electrical energy went up 31 percent on the day the tax was introduced and is projected to average 15 percent in the medium term.

Two large private energy producers, Energa and Aegean, lost 200,000 euros each on the first day, while the Public Power Corporation lost about 1.5 million. By contrast, energy importers made handsome profits — up to 100,000 euros in a few hours.

In letters to the government, the private producers pointed out the incompatibility of the measure with European legislation, which exempts raw materials for electricity production from taxation, save for cases where it is linked with environmental protection. They are now examining the possibility of filing for injunctions and appealing to the European competition authorities.

In 2011, Greek tourism realized an impressive increase in visitors and earnings, thanks to a sharp improvement in the competitiveness of the offered packages. One of the reasons for this was the decision to cut the VAT rate on accommodation to 6.5 percent. However, in 2012 the Greek ?basket? of tourism services will be more expensive — more so for individual tourists and less so for the all-inclusive holidays which were exempted from the 10 percent hike in VAT (from 13 percent to 23 percent) on catering services.

Tourism is the only exporting activity that is subject to VAT. The Association of Hellenic Tourism Enterprises (SETE) is calling for a unitary 6.5 percent rate on the entire range of package services. It also wants the rate on catering reduced to 13 percent.

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