Spain's new VAT revenue will reach 5 billion euros

10:04, July 02, 2010      

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New rates for Value Added Tax (VAT) become effective in Spain in July, increasing rates from 16 to 18 percent. The reduced tax imposed on new real-estate sales, processed foods and catering services will increase from 7 to 8 percent.

The government headed by Jose Luis Rodriguez Zapatero hopes to collect more than 5 billion euros (6.16 billion U.S. dollars) with the new tax increase and is confident that the upgrading will not affect consumer confidence ahead of the summer sale period.

The government keeps its expectations for consumer spending for the remaining of the year and hopes to collect 5.15 billion euros with this new policy in a whole financial year, which is 15 percent more with respect to VAT revenues last year.

Spain's vice-president, Maria Teresa Fernandez de la Vega, said this week that VAT increase will not affect consumer spending and that it will not slow down the rate of the country's economic recovery.

De la Vega stressed again that the government is working hard to ensure Spain recovers jobs and its economic growth. She sent out a message of "calm" by adding that she is "certain" and " convinced that what the government is doing is what must be done."

VAT increases will not affect all products equally. Basic products such as bread, milk, eggs, fruit, vegetables, cheese, etc. , will not be affected by the new rates since they will continue to be taxed by a reduced form of VAT which will stay as it was. Nonetheless, beef, poultry, fish and preserves will see their VAT go up from 7 to 8 percent.

Travelling costs will also rise from now on. Bus, train and plane tickets will be charged with an 8 percent VAT. It is therefore anticipated that the average annual cost of transport will increase by some 43 euros.

The same applies to the entertainment sector. Cinemas, theaters and entertainment parks will be taxed with an 8 percent charge. Health services are excluded from the rise in VAT. In total though, the VAT increases will cost the average some 135 euros only for the remainder of this year.

Together with the new VAT legislation, consumers will also have to face a more expensive gas bill, which will rise by 6 percent.

Despite government confidence, it is difficult to know how consumers will react to the new rates, even less so now, with the start of the sales period. Inflation in Spain has decreased steadily in the last three months, confirming an annual evolution of 1.5 percent, according to National Statistics Institute (INE).

Even if the increase in VAT will be introduced in a low inflation environment, some analysts believe that the two points increase in VAT will have an impact of six to eight decimals in the inflation rate. The Instituto Flores de Lemus based at Madrid' s Carlos III University, expects a rise in prices which will reach a 2 percent inflation rate as a result of VAT increases.

Traders also fear the effect of the new rates, and precisely at this time, with the sales period just started. According to Miguel Angel Fraile, general secretary of the Spanish Trade Confederation, "the message of increasing VAT is negative for returns because the message is being sent out that prices are going up and people are now inclined towards low cost purchases."

It is expected that the impact of the rise in VAT in consumer spending will be moderate given the sale season is now open, although Spain's slight increase in consumption during the last semester could well respond to an avoidance of the new VAT rates by consumers. The car and real estate industries have been the two sectors enjoying something approaching green shoots.

Other sources are less optimistic. According to a study by the Independent Consumer's Federation (FUCI), the estimated spending for this sale period will be half that of 2006, when it reached 130 euros (160 dollars). Since that year, average consumer spending has progressively declined in Spain. The study relates this reduction with reduced consumption levels due to the crisis and to the growing awareness of the new VAT rates.

Source: Xinhua


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