Germany has cut the rate of value added tax (VAT) imposed on natural gas to just 7% in a bid to offset the impact of a new gas levy on consumers set to come into effect from October.
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Chancellor Olaf Scholz said Aug. 18 the VAT reduction -- down from the current rate of 19% -- was part of targeted efforts to ease the pressure of high gas prices on consumers.
Initially, Germany had sought to exempt the new gas levy from VAT, but this was rejected by the European Commission.
The levy, which will begin to be charged to all consumers from Oct. 1, has been calculated by gas market manager Trading Hub Europe (THE) at 2.419 euro cents/kWh (Eur24.19/MWh).
This means an additional cost to a German household of four of an estimated Eur480/year.
"Rising energy prices are a major burden for many citizens," Scholz said. "The federal government therefore decided today to reduce the VAT on gas consumption to 7% for a limited period of time," he said.
Reducing VAT on gas could, however, see less inclination to save gas despite German officials having said in recent weeks that gas consumption needed to be reduced by 20% to make it safely through the next two winters.
German wholesale gas prices remain among the highest in Europe, with the THE month-ahead price hitting a new record high of Eur227.48/MWh on Aug. 17, according to Platts price assessments by S&P Global Commodity Insights.
Economy minister Robert Habeck welcomed the announcement of the temporary reduction in VAT on gas.
"It has always been clear that we do not want people to be burdened additionally by VAT on the gas levies. Since a direct tax exemption is not possible under European law, a temporary reduction in VAT on gas is logical," Habeck said.
He said the VAT cut "made sense" as it would be easier to implement and would reach consumers quickly.
The new gas levy is being introduced to help offset the cost of utilities having to buy gas on the open market to replace lost Russian volumes.
Russia's Gazprom has reduced flows to Germany in the Nord Stream pipeline to just 20% of capacity.
German utility Uniper has been the worst affected by the cost of procuring replacement volumes, posting a net loss in the first half of more than Eur12 billion.
The new levy is due to be imposed from Oct. 1 until March 31, 2024, and the VAT reduction is set to remain in place for the duration of the tax.
"The federal government agrees that gas customers should not incur any additional burdens from the mandatory levying of VAT on gas surcharges," Scholz said.
"This applies in particular to the gas procurement levy you are aware of. However, it also applies to other surcharges such as the balancing charge," he said.
Scholz said the VAT reduction would represent "significant" relief from the additional burden caused by the levy.
"We expect companies to pass this reduction on to consumers on a one-to-one basis. We will also communicate this very clearly," Scholz said.
He also said that Germany would put together a third relief package to ease the pressure on citizens and companies in the coming weeks.
"We are confidentially discussing what the package will look like in the government. The question of fairness is crucial in order for the country to stay together during this crisis," he said.
Habeck agreed that targeted relief was important. "The question of fairness is key in this crisis and it needs a strong answer," he said.
"Some companies are feeling the effects of the energy crisis enormously, especially small and medium-sized enterprises. It is important that companies receive targeted support here."