Flat VAT rate must amount to 18 pct to avoid losses

The flat value-added tax rate being considered by the government will have to be set at 18 percent in order to have a neutral impact (neither positive nor negative) on its revenues. A lower rate of 16 percent, which is apparently being considered by the government, appears not to have been accepted by Greece’s creditors as it would create a fiscal gap and would entail additional austerity measures.

There are currently three VAT rates (6.5, 13 and 23 percent), as well as a 30 percent discount on each for the Aegean islands. The Finance Ministry has calculated that the average rate comes to 17.025 percent; however, it is also planning to exempt certain drugs and a number of food items, which means that the single rate will have to be pushed up to 18 percent to have a neutral impact on revenues.

If the measure passes and the flat rate of 18 percent is imposed from the second half of the year, households will face a significant added burden as the bulk of their expenses are food and electricity, both of which currently carry a 13 percent VAT rate.

Brussels counters that VAT evasion will be reduced with the introduction of a flat rate, noting that most of the tax dodging concerns services taxed at 23 percent. This was the case when the previous government reduced the rate on catering from 23 to 13 percent.

On the other hand, one must also factor in the likely increase in tax dodging in the area of rented holiday accommodation, which will face a VAT hike from 6.5 to 18 percent. The rise will be even greater on the islands, as the current rate for rented holiday accommodation there is 4.55 percent.

Ministry data show that if VAT was paid on all goods and services, revenues would amount to 126.6 billion euros. Of this, 57.8 billion euros would come from the 23 percent levy, another 57.8 billion from the 13 percent category and 10 billion from the 6.5 percent bracket. The remainder falls into other categories. However, in actual fact, VAT is only applied to 73.3 billion euros’ worth of good and services due to tax evasion, meaning a loss of 9.1 billion euros in revenues.

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