Government preparing legal changes related to "floating" VAT

The Ministry of Finance has already prepared amendments to the Value Added Tax (VAT) Act that would allow the Government to potentially reduce the tax rate on oil derivatives, by a maximum of ten percentage points, but the application of this measure would only occur in the event of further escalation of the conflict in the Middle East and, consequently, an even stronger rise in energy prices.

According to the Ministry of Finance, legal changes are under consideration and consultation with the Office of the Prime Minister, and they would enable the Government to intervene in the VAT rate exclusively on petroleum products, due to the escalation of the crisis. Such a potential intervention would be "very short-term", until the situation normalizes, but the Ministry hopes that it will not come to that.

Namely, these changes mean that the Government would not have to go through the parliamentary procedure with changes to the law every time in the event of a change in fuel prices, but the new VAT rate would be determined by decree, that is, by the Government's decision, following the example of its earlier interventions in the matter of fuel, probably on a biweekly basis.

In accordance with European directives, the general VAT rate is applied to fuel, in the case of Croatia it is 25 percent, and the idea of introducing the colloquially called "floating" VAT is to potentially reduce it on petroleum products, but, in accordance with the same directives, this can go up to a maximum rate of 15 percent.

The announcement of changes to the VAT law and the temporary introduction of the "floating VAT" measure was also announced the other day by Prime Minister Andrej Plenković, emphasizing that "this is truly a last resort measure in the event of a major escalation", i.e. a tool that would eventually be used if necessary, and not immediately after the amendments to the law are passed.

Option and reduction of the European part of excise duties

Last year the state budget received around 980 million euros in VAT from fuel. According to this figure, a VAT reduction of one percentage point would result in slightly less than 40 million euros in annual revenue, while the "worst case" scenario, i.e. a VAT reduction of a maximum of ten percentage points, would mean around 380 million euros in annual revenue for the state from VAT on fuel, the Ministry of Finance calculated.

Apart from the introduction of a "floating" VAT, the only remaining tool in the event of further escalation of the conflict and price increases is a reduction in the European part of the excise duty. With the aim of opening up room for maneuver for encroaching on the European excise duty, a letter was sent to the European Commission last week initiating this process, but the Ministry says that this will take some time. Namely, the European part of the excise duty on diesel amounts to 33 eurocents, and if it wants to reduce this segment of the fuel price, each country must seek permission from the Commission for itself.

When it comes to the revenue and expenditure side of the state budget, the Ministry says that the first quarter of this year went in line with expectations. However, the challenge is certainly the loss of some revenue due to the reduction in excise duties on fuel, which could be significant on an annual basis. The Ministry also responded to the thesis that the loss of excise revenue could in some way be reimbursed by VAT revenues, due to rising prices.

If the crisis persists, it is "impossible not to expect" an impact on the tourist season

Thus, they present an estimate that, if the situation surrounding the conflict in the Middle East remains unchanged until the end of the year, the loss of income in the part of excise duties would amount to a little more than 200 million euros, and the "profit" from VAT would be a little over 100 million euros.

This means that the "minus" would be around 100 million euros, they estimate.

If the crisis continues, the Ministry says that it is "impossible not to expect" a certain effect on the tourist season in Croatia, in terms of tourist arrivals and overnight stays. The Ministry hopes to de-escalate the situation before the start of the peak season, while the current level of escalation, they believe, would probably mean a significant absence of overseas guests.

The government's projections on inflation trends in 2026 due to the situation in the Middle East have already been called into question, while, when it comes to GDP growth this year, the Ministry currently sees no reason why the current projection of 2.7 percent would not be realized.

They also say that the goal is to continue leading a responsible fiscal policy, while controlling the deficit and public debt. At the same time, it could be heard that budget rebalancing is not an issue at the moment.

Source: HRT