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.
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.
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.
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.
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.
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.
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.
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.
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.