Center surprises Reform with plan to lower VAT on energy

Electricity pylon.
Electricity pylon. Source: Chris Frenzel / Pixabay

Last week, the government announced that it had agreed on two measures to partially compensate residents for soaring energy prices. However, the Center Party has now come up with a proposal to temporarily cut value-added tax (VAT) on energy, which is not part of the government's plan.

Under the agreement reached last week, a temporary reduction in electricity network charges for all consumers will cost the state around €75 million, while compensating less well-off households for the increase in electricity and gas prices through municipalities will cost an additional €20 million.

The idea of lowering VAT was also discussed, but was dismissed as complicated and time-consuming, as described by Minister of Economic affairs and Infrastructure Taavi Aas (Center). However, the Center Party has now changed its mind.

"Reducing network charges alone is not enough to make these winter bills less severe. The most effective measure, which could help both private consumers and businesses, would be to temporarily lower VAT on district heating bills as well as on electricity and gas," MP Erki Savisaar, a member of Center's governing board, said.

He added that if so wished, the Riigikogu would be able to make the necessary legislative changes in a few weeks. EU laws allow VAT to be reduced to 5 percent, meaning by as much as 15 percentage points in Estonia's case. That is exactly what Center has proposed to the Reform Party, its partner in the coalition.

However, the prime minister's party says the additional initiative of its coalition partner comes as a surprise. Mart Võrklaev, the chairman of the Reform group in the Riigikogu, said that the coalition partners should look at the subject in a comprehensive fashion and that he sees such competitive bidding as perhaps not the most sensible thing to do.

There is also an alternative proposal, from opposition party Isamaa, to lower VAT on energy from the current 20 percent to 9 percent, which would leave an estimated €200-220 million in the wallets of consumers, while having no negative effect on fiscal receipts due to the bigger amount of VAT collected as a result of the high energy prices. 

Savisaar, too, said that the temporary VAT cut would have no impact on the state budget. "After all, the price has risen so much and VAT has been collected so much in this year's budget and, according to forecasts, will be also next year. The [budget] has not taken into account the high price of electricity and gas. So it's a budget neutral measure all in all," the Center MP explained.

Reform disagrees, however, saying that the network charge discount is going to be a cost anyway, and an additional VAT measure on top of it means that certain revenues will not be collected and there will be a shortfall in the state budget.


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Editor: Kristjan Kallaste

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