Despite the prime minister’s announcements, it seems that the government has decided against the reduction of the general VAT rate, which is among the highest in Europe.
The general VAT rate will not be cut, but certain agricultural products will be taxed less, two salary contributions will be abolished, the threshold for the 36 percent income tax bracket will be increased, and health insurance salary contribution will be increased. This is the latest version of the tax reform prepared by the Ministry of Finance, reports Jutarnji List on July 27, 2018.
So it seems that HDZ has decided not to fulfil its pre-election promise to cut the general VAT rate from 25 to 24%, which would cost the budget around 2.1 billion kuna a year. Instead, it will introduce changes in the income tax system that will affect all salaries in Croatia. That is why Prime Minister Andrej Plenković does not have to worry too much that someone will criticize him for not fulfilling his promise.
Many experts and HDZ’s coalition partners believe that it is better to increase the salaries than to reduce the VAT rate by just one percent, which would hardly be felt by most citizens. It seems that Plenković has decided to listen to the advice and to give up on his promise which he spoke about as recently as just a few weeks ago.
According to the latest plans, the government will abolish the contribution for unemployment and the contribution for work-related injury insurance. The unemployment contribution is paid at a rate of 1.7% and it brings in 1.5 billion kuna annually. The injury insurance is paid at the rate of 0.5% and brings in 600 million kuna per year. Without these two contributions, the budget will lose about 2.1 billion kuna in revenues, which is the same as the projected loss from a one percent reduction in the general VAT rate.
With the abolition of these two contributions, the average salary of 10,000 kuna gross would increase by about 220 kuna net. However, since the government also plans to increase the contribution for health insurance from 15 to 16.5 percent, the increase in net salaries will be lower.
When it comes to the 36% income tax bracket, HDZ’s coalition partner HNS has demanded that the bracket should be completely abolished and that all income should be taxed at a rate of 24%. However, in the latest version of the tax reform, the 36% bracket remains, but the threshold will be increased to 25,000 or 35,000 kuna from the current 17,500 kuna, which means that the salaries higher than 17,500 kuna will be significantly increased.
Still, there will be changes to the VAT system after all. It is expected that the VAT rate will be reduced from 25% to 13% for fresh meat, fruit, vegetables and fish. This should further stimulate local agricultural production, and also lower the prices of these products for consumers.
It is expected that the changes will be officially adopted after the summer and enter into force in 2019.
Translated from Jutarnji List (reported by Goran Penić).
