VAT to rise to 20%

MOST everyday products and services are expected to cost a little more as of 2014 after the government unveiled plans to raise VAT.

Under the plans, the basic rate of VAT will rise from 19.6% to 20%, expected to bring in about €3.3billion in extra tax a year – one of the key measures Prime Minister Jean-Marc Ayrault has announced in a list of 35 measures aimed at making French business more competitive.

Tax on goods and services at the intermediary rate of 7% will rise to 10% (generating €3.8 billion), including restaurant meals and hotel or campsite stays, transport, home help, cinema, museum visits, home renovation work and non-reimbursable medicines.

The lowest 5.5% rate, on “essentials” like food and energy, will, however, be slightly dropped, to 5%, giving back around €800 million; a measure meant to help less well-off families, who spend the largest proportion of their incomes on these.

This applies to food (but not sweets or certain luxuries like foie gras and caviar), bottled water and non-alcoholic drinks and electricity and gas subscriptions. It should also apply to books and live shows, which are dropping to the 5% rate as of January.

Certain products at the “ultra reduced rate” of 2.1%, like reimbursable medicines, are not affected.

The plans follow a report by businessman Louis Gallois which recommended hiking VAT on some lower rate products.

The extra money brought in will help balance out other measures in the packages, such as a tax credit for businesses, and is part of a “coherent, complete” package according to Prime Minister Ayrault.

Louis Gallois’ suggestion of a generalised rise in the CSG social contributions, levied on many income kinds, was not, however adopted.

Restaurateurs’ group Umih reacted with anger to the rise in their tax, with president Roland Héguy calling it “a slap in the face”.

Other commentators such as economist Thomas Pinketty, who has close links to the Socialist Party, said the measure was uncomfortably close to Nicolas Sarkozy’s unpopular plan for “social VAT” (raised VAT to fund social security).

Despite the lowered rate for “essentials”, the president of consumer body UFC-Que Choisir, Alain Bazot, criticised what he called a “blind hike to VAT”, saying the changes would nonetheless raise families’ costs, representing a total extra six billion euros in tax.

Photo: jmayrault