Economic stimulus package Drop in value added tax (VAT) - important questions and answers

A lower rate of value added tax (VAT) will apply from 1 July. The standard rate will drop from 19 to 16 percent, the reduced rate from 7 to 5 percent. The goal here is to boost consumption and provide new stimulus for the economy during the coronavirus pandemic. What is the reason for the VAT reduction? How long will it apply? And will everything have to be relabelled with its new price? The most important frequently asked questions.

VAT rates crossed out on a receipt

The VAT reduction benefits consumers and the German economy during the coronavirus pandemic.

Photo: imago images/Christian Ohde

What tax rates apply - and for how long?

VAT will be reduced for a fixed period from 1 July 2020 to 31 December 2020. The standard tax rate will drop from 19 to 16 percent, the reduced rate from 7 to 5 percent.

Why will VAT be reduced?

First and foremost, the Federal Government wants the temporary reduction in VAT to boost consumption and provide new stimulus for the German economy, which has been battered by the coronavirus pandemic. Alongside German citizens, the reduction will also support companies from all sectors, from gastronomy to the car industry, which will all benefit from additional sales.

Why is the VAT reduction for a fixed term?

The fixed term of six months is needed to create immediate buying incentives and economic stimulus. In particular, the tax reduction will also produce an additional incentive for big purchases in the second half of 2020. "The aim is for German citizens to make a potential buying decision now and not put it off until next year or the year after,” said Federal Finance Minister Olaf Scholz.

Will all goods and services automatically become cheaper?

In principle, traders and service providers are to pass on the lower VAT rate to consumers so that goods and services become cheaper. Companies are not, however, obligated to do this by law. Following statements issued by the food industry and German railway company Deutsche Bahn, for example, the Federal Government is confident that the reduced tax rate will be passed on to customers. International experience shows that this instrument is effective.

How will trade implement the VAT reduction?

Traders and service providers can, for example, offer fixed discounts at the checkout, without having to change the price labelling for the six-month period. The Price Indication Ordinance (Preisangabenverordnung) is authoritative on this matter. The Federal Government is confident that the VAT reduction will be passed on to customers with as little red tape as possible.

How does the tax reduction affect goods that I have ordered but not yet received?

As regards the purchasing of goods, the deciding factor is when you receive them. If the goods are delivered between 1 July 2020 and 31 December 2020, the new tax rates are to be applied. However, this does not necessarily mean that you only need to pay a lower purchase price. This depends on the contract and agreements made in this contract with the seller.

What happens with trade services covering a longer period?

In principle, the new VAT rates are to be applied to trade services that come to an end between 1 July 2020 and 31 December 2020.

What will be taxed and at what rate?

VAT is a pure excise tax and is payable on all purchases. There are, however, two VAT rates: the standard percentage rate and the reduced percentage rate. The principle is simple: most products and services are taxed at the standard rate. By contrast, the reduced rate applies to goods for everyday use. These are mainly foods for basic provisions.

What will the VAT reduction cost the state?

A recent assumption by the German working group tasked with estimating tax revenue (Arbeitskreis Steuerschätzung) is for a VAT revenue shortfall of EUR 22.3 billion in the current year due to the coronavirus-related drop in consumption. With tax rates being reduced from 1 July, there will be a further drop of EUR 19.6 billion in revenue for the federal budget, according to calculations by the Federal Ministry of Finance.

VAT makes up around a third of the state's total tax income. In 2019, out of a total of nearly EUR 800 billion in tax revenue, more than EUR 243 billion came from VAT.

Turnover tax or value added tax? Both terms are used synonymously. “Turnover tax” is the correct term according tax law, but "value added tax" has become established in everyday language.

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