The new shape of VAT (or what lies beneath the tax reform)

This change is envisaged by the tax reform bill sent to the Lower House of Parliament last week by Czech senators, who returned the bill with several proposed amendments. Reducing the limit from CZK 1 million to CZK 750 thousand per year is an unwise step, however, and one which will surely encourage growth in the grey economy in the Czech Republic.

Discussions are taking place on decreasing the turnover limits for obligatory VAT registration in an effort to increase state revenue. In the bill’s justification report the Ministry of Finance assumes that, following the registration of new VAT payers, state revenue could be increased by about CZK 5 billion. Upon learning of the bill, the entrepreneurial community immediately began to protest since, in its opinion, this measure is in direct conflict with the government’s proclaimed support for small businesses.

Turnover over CZK 62 thousand per month? If so, take note

It is true that a relatively large number of entrepreneurs with an annual turnover of between CZK 750 thousand and CZK 1 million will be affected by the amendment to the VAT Act. In monthly figures, the group of entrepreneurs affected will include all those with an average turnover of between CZK 62.5 thousand and CZK 83 thousand. Primarily, gainfully self-employed individuals providing services will be hit, but many entities will also be affected even if their businesses do not constitute their core activities, such as municipalities, schools and cultural institutions.

I believe that reducing the turnover limit will have two negative impacts on potential payers. Firstly, they may have to increase the prices of their goods or services. And because small-scale entrepreneurs have little enough wiggle room when it comes to altering their costs, they will have to pass at least part of the tax burden on to their customers. It can be assumed that they might thereby lose their competitive edge over larger businesses and some may even decide to close their doors all together.

Secondly, there will be a greater administrative burden, which the entrepreneurial community has been fighting to reduce for many years. Not only will new payers have to file tax returns every quarter but they will also have to monitor carefully their inputs to be able to raise a proper claim for a tax deduction. This will affect those who deduct lump-sum costs from their income tax and, moreover, administrative costs in the non-entrepreneurial sphere will go up, a great part of which are financed from public funds. In a period of budget cuts, this will be highly unpleasant and some non-entrepreneurial entities will certainly give careful consideration to improving their budgets using revenues taken from their business activities.

I am convinced that reducing the turnover limit will lead to a greater volume of activity in the grey economy, whose share of the Czech economy will expand even more as some entrepreneurs will have yet another reason to conceal their incomes.

Will the change actually add billions of crowns to the state coffers or will it just be another tax obstacle put in the way of small businesses?