THE 5.0 per cent hike in VAT on food and medicines, which came into force yesterday was met with a volley of pot shots being fired at the government from all angles.
The hike applies to foodstuffs, medicines and vaccines, and to beverages other than alcoholic drinks (beer, wine) and soft drinks that are already sold with a VAT of 15 per cent.
It is set to affect the price of basic commodities such as bread, milk, meat and vegetables.
The latest levies – estimated to bring state coffers some €60 million a year – come hot on the heels of a tax hike on tobacco products last month, while water price hikes are imminent.
Opposition politicians yesterday took turns criticising the AKEL administration, which they accused of bad timing. Meanwhile, “offset benefits” became the buzzword of the day.
“Cypriots cannot handle any more taxes, and the country cannot exit the financial crisis with the government’s policy of taxes alone. What we need is economic growth,” said DISY MP Lefteris Christoforou.
Not only had the government put the chokehold on taxpayers, it had also neglected to take timely action to introduce offset benefits for the more financially vulnerable groups.
A study carried out by a leading Cyprus economist has demonstrated the batch of taxes will disproportionately affect lower-income groups. The analysis found pensioners will take a 3.5 per cent hit on their purchasing power, compared to 2.5 per cent for large families, 1 to 2 per cent for middle income groups, and just 0.9 per cent for high income earners.
The loss of purchasing power is also likely to be felt more by private-sector employees who do not get Cost of Living Allowance (CoLA).
Christoforou charged that over the course of a year the government had imposed taxes or tax hikes worth €200 million (for fuel, heating oil and tobacco). The five percent VAT now was another nail in the coffin for consumers, he said.
In a similar vein, EDEK MP Giorgos Varnava noted that the government should have prepared a package of offset benefits before burdening consumers with new taxes. The benefits should be geared at the most vulnerable sections of society, such as pensioners, people on welfare, the jobless, and large families.
Stavros Violaris of the European Party accused the government of going back on earlier promises not to levy any new taxes, and said the government could – and should – have postponed the fiscal measure, especially as people were already finding it hard to make ends meet.
AKEL leader Andros Kyprianou assured newsmen that the government has a commitment to introducing offset measures – but admitted that the specifics have yet to be worked out.
“This will be the result of consultations,” he said.
Today, Finance Minister Charilaos Stavrakis will have the first meeting with Labour and Social Insurance Minister Soteroulla Charalambous to discuss such measures.
The tax on foodstuffs and pharmaceutical products is part of Cyprus’ commitments to the European Union.
EU Directive 2006/112 requires member states to have a minimum standard rate of VAT of 15 per cent and one or two reduced rates not to be below 5 per cent. Some member states have a zero per cent VAT rate on certain supplies, having agreed this as part of their EU Accession Treaty.
The law for the 5 per cent VAT was passed through parliament with the combined votes of ruling AKEL and their coalition partners DIKO.
Greens deputy George Perdikis suggested the administration was hiding behind its EU obligations.
“We could have asked for an extension, or we could delay implementation, even at the risk of sanctions from the EU. It would not be unheard of. Cyprus has 25 or so pending obligations to the bloc anyway,” Perdikis told the Mail.
Loukas Aristodemou, head of the Cyprus Consumers and Quality of Life Association, said government statistics showed an average increase of up to 20 per cent in the price of basic goods (food, fuel) during the year 2010.
Under the changes introduced yesterday, VAT charged for prepared foods (for take-away and delivery) has been cut from 8 per cent to 5 per cent.
Aristodemou warned: “Consumers should be aware of this, and should check to see if restaurants apply the new (lower) rate, because I’m not so sure anyone else will.”
