Is Government shooting itself in the foot with VAT rise for hotels?

More expensive accomodation will lower visitor numbers. (Postimees/Scanpix)
4/30/2015 3:26 PM
Category: Economy

A proposed increase – from 9 percent to 20 percent – in the value-added tax (VAT) is causing consternation in Estonia's tourist industry. It's viewed as highly disadvantageous. Even the Minister responsible for enterprise, Urve Palo, is opposed to it, saying that the Government is “shooting itself in the foot”. During the recent election campaign, however, Prime Minister Taavi Rõivas precluded rescinding any current exemptions to the VAT on tourist accommodations.

A petition launched by the Estonian Travel and Tourism Association – signed by more than 400 of its members, unions and related businesses – claims the tax-increase will paralyze the industry, as it overlooks it's impact on Estonia as a tourist destination. The Association's counterpart in Latvia has also addressed the Estonian Government on the matter, as tourism is a regional industry. Apart from the UK, Denmark and Slovakia, European countries have tax exemptions in place for the accommodation sector.

Small businesses, such as tourist farms and B&B's with low-income employees, will be hurt the most by the tax-increase, aggravating an industry already facing hard times. Tourism fell by 10 percent in a year and, more so, from the significant sectors: Finland and Russia.

Minister Palo is siding with the industry; this, despite her part in the coalition that conceived the plan. “It's unwise and I must oppose it”, she announced to the Estonian press. "Loosing the VAT exception won't make life in Estonia any better. Quite the opposite, people stand to lose their jobs and the Government forgoes an estimated 34 million euros in revenues, which is considerably more than what it hopes to gain. It's shooting the economy, which should be creating added value, in the foot."

The Minister of Finance, Sven Sester, is willing to negotiate the tax-increase. Its risks were recognized at a round-table discussion at the Finance Ministry on Monday. On Tuesday, at a high-level Government meeting on budget strategy, it's reported that Sester proposed scrapping the idea, entirely, and suggested alternatives.

Prime Minister Rõivas has announced further discussions at a Cabinet meeting scheduled for Thursday.

M. Oll, A. Gutman

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