Yesterday, the lower house of Parliament passed an amendment to a bill that calls for VAT reclassification (from 5% to 22%) of telecommunication services as of January 2004. We assume that all the operators, including the dominant fixed-line operator, Cesky Telecom, will reflect most of the VAT reclassification in their tariffs. While the short-term effect on operators’ traffic volumes will be negative, we believe the medium-term demand price elasticity for these services is very low. The amendment is one in a series bills related to public-finance reform, part of the government's effort to combat the state's dire public deficit. The reform also calls for a decrease in the corporate-income-tax rate, from the current 31% to 24% by 2006, and for an increase of excise taxes, which is expected to negatively affect Philip Morris CR's performance next year; it should be discussed by the lower house of Parliament on Friday.
Jiří Soustružník