Estonia has enacted a significant tax reform set to unfold across 2024 and 2025, with a key component being the increase in the Value-Added Tax (VAT) rate. Effective from January 1, 2024, the standard VAT rate will see a rise from the current 20% to 22%. This adjustment forms part of a broader strategy by the Estonian government to balance the state budget. The reform also introduces changes to reduced VAT rates applicable to specific services, with the rates for accommodation services and press publications set to increase from January 1, 2025
How will the VAT rate increase affect consumers?
The VAT rate increase will affect the prices of most goods and services in Estonia, except for some items that are exempt or have a reduced rate. For example, the VAT rate for books, newspapers, medicines, and public transport will remain at 9%. The VAT rate for accommodation services will also stay at 9% until June 30, 2022, and then increase to 14%. The VAT rate for food and non-alcoholic beverages will increase from 9% to 10%.
According to the Ministry of Finance, the average consumer price index will increase by 1.1% in 2022 due to the VAT rate hike. This means that the average household will spend about 10 euros more per month on goods and services. However, the impact will vary depending on the consumption patterns and income levels of different groups of consumers. The government has announced some measures to mitigate the negative effects of the VAT rate increase on low-income households, such as increasing the basic exemption and the subsistence benefit.
How will the VAT rate increase affect businesses?
The VAT rate increase will also affect the costs and revenues of businesses that sell goods and services in Estonia or import them from other countries. Businesses will have to adjust their prices, invoices, accounting systems, and contracts to reflect the new VAT rate. They will also have to pay more VAT to the tax authorities and claim more VAT refunds from their input purchases. The Ministry of Finance estimates that the administrative burden of the VAT rate change will be about 30 million euros for businesses.
The VAT rate increase will have different impacts on different sectors of the economy, depending on the price elasticity of demand and the degree of competition. Some businesses may be able to pass on the higher VAT rate to their customers, while others may have to absorb the cost or reduce their profit margins. The government has announced some measures to support the sectors that are most affected by the VAT rate increase, such as tourism, culture, and sports.
