While the 25% general VAT rate will not be reduced anytime soon, the government now has the option of abolishing VAT altogether for one group of products or services.
The European Commission has accepted the demands of new members of the EU and will allow them to exclude some of the goods and services from the VAT system. Because of the accession to the European Union, Croatia had to introduce a five percent VAT rate on bread, medicines, and milk, which had previously been exempt from taxation. However, this week, the European Commission has proposed new VAT payment rules that will give member states greater flexibility in setting the value-added tax rate and create a better tax environment for boosting the growth of small and medium-sized enterprises, reports Večernji List on January 20, 2018.
The new initiative from Brussels coincided with the government’s announcement that Croatia would start reducing the general rate of the VAT, although probably not before 2020. The value-added tax currently brings about 50 billion kuna a year to the state budget.
For nearly a quarter of a century, the EU has opposed the expansion of tax exemptions and the use of various VAT rates to achieve political goals, but this primarily related to new EU member states, since the old ones retained the exceptions. Thus, today most western EU members apply the zero VAT rate to newspapers, books, prescription medicines, foodstuffs, social housing, hygiene supplies, new housing construction, gold coins and the like.
While new member states could not go below five percent, the proposed rules say that, in addition to the general VAT rate of at least 15% (it is currently 25% in Croatia), member states will be able to have two separate reduced rates of between five percent and the general rate, one total exemption from VAT (i.e. the "zero rate") and an additional reduced rate of between zero percent and the amount of other reduced rates. Furthermore, a new list will be compiled of products to which a general rate will have to be applied, such as weapons, alcoholic beverages, and tobacco products.
According to these new rules, Croatia could have four VAT rates, in addition to the zero rate, and this new situation is likely to be a subject of further discussions, but also attempts by different interest groups to lower taxes for their product and services. The rules say that the zero rate could be applied to just one product group, and the governments will decide whether it will be daily newspapers, like in most western countries, or perhaps prescription drugs, bread or something else.
For now, Prime Minister Plenković and Finance Minister Marić have talked about just a reduction in the general rate, but the new rules from Brussels will increase the pressure to speak about other rates as well.
To protect public revenues, member states will have to ensure that the weighted average VAT rate remains at least 12%, but Croatia is far above this lowest recommended limit since its average VAT rate is 20%. According to the existing rules, EU member states may exempt from the VAT system small businesses if they do not exceed a certain amount of annual turnover, which differs from one country to another. In Croatia, the limit this year is 300,000 kuna.
EU Commissioner Pierre Moscovici said that the new rules would go further towards establishing a unique European VAT area. “Common rules are proposed when they are needed for the functioning of the internal market and for greater flexibility of governments to be able to express their political preferences by setting the VAT rate,” said Moscovici.
Translated from Večernji List.
