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About 60 percent of the VAT reduction passed | Free Press

Frankfurt / Main (dpa) – According to the Bundesbank, consumers benefit from the VAT reduction, especially for food and industrial goods.

The lower tax rates that have been in effect from the beginning of July to the end of the year appear to have been passed on in full for most food and industrial products (excluding energy), according to the latest monthly Bundesbank report published on Monday. In the case of services, however, only a third of the reduction was passed on.

Relative to the Harmonized Index of Consumer Prices (HICP) as a whole, a good 60 percent of the change could have been passed on. Most of the prices were changed in July.

To cushion the economic consequences of the Crown crisis and stimulate the economy again, the federal government reduced the VAT rate for six months starting July 1: from 19 to 16 percent and from 7 to 5 percent. This should boost consumption as an important pillar of the national economy. However, retailers and service providers are free to decide whether and how they pass on the lower tax rates to consumers.

According to the Bundesbank, there were some falls in the prices of food and industrial goods beyond the effect of the value added tax. Some retailers had announced in advance that they would not lower the prices of their entire product range, but would offer very high discounts on selected products.

According to the Bundesbank, many service providers have likely withheld most of the VAT cut. Measures to contain the pandemic are hitting hotels, restaurants, hair salons and other service providers hard. In addition to a drop in sales, there are additional costs for compliance with hygiene regulations, such as the installation of partitions.

Only in a few service areas that were not adversely affected by the restrictions and whose prices were relatively easy to adjust were the lower tax rates completely carried over, according to the monthly report. This included telecommunications, for example.

The inflation rate in Germany has been hovering around zero or in negative territory for some time. According to the Federal Statistical Office, consumer prices in October were 0.2 percent below the level of the same month last year. Consumer prices (HICP), harmonized for European comparative purposes, even fell 0.5 percent year-on-year.

The Bundesbank expects prices to pick up again when the VAT cut expires in January 2021. “In the second half of 2021, the inflation rate is likely to turn out to be quite high temporarily, because prices had been affected by the VAT reduction a year earlier, “wrote the experts.