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Update: What you should know about Germany’s VAT cut

Here's a look at what the VAT reduction will mean for people in Germany.

Update: What you should know about Germany's VAT cut
Products are likely to become cheaper under the plans. Photo: DPA

On June 29th, the Bundestag voted to reduce VAT (value added tax) in Germany for six months from July 1st. 

The aid measures are aimed at boosting the economy after the coronavirus pandemic shutdown, and which affect everyone living in Germany.

Here’s a look at what it means for you.

Explained: How does Germany's Kinderbonus coronavirus payment work?

What's happening?

On June 4th 2020, the grand coalition, made up of Angela Merkel's centre-right Christian Democrats (CDU) and the centre-left Social Democrats (SPD), agreed on a €130 billion economic stimulus package aimed at kick-starting the economy and supporting people in Germany.

Among the plans are a €300 Kinderbonus for all families, support for business owners, reduced electricity costs as well as a value added tax reduction.

READ ALSO: How Germany's new multibillion aid package will benefit you

Why is the government taking this action?

The pandemic resulted in a two-month shutdown across Germany, causing massive damage to the economy and people's livelihoods.

The government has been supporting business owners, freelancers and workers through various aid programmes.

Now the country is emerging from lockdown, the stimulus package is to get people spending again. It is hoped by reducing value added tax to products, consumers in Germany will buy more products.

What will happen to VAT?

Lots of items in supermarkets, furniture stores, electrical stores and elsewhere are likely to become cheaper for six months due to the reduced value added tax.

The standard VAT rate will fall from 19 to 16 percent between July 1st and December 31st. The reduced rate, which applies to many foods and everyday goods, will drop from 7 to 5 percent.

READ ALSO: How much will you save on products with Germany's VAT reduction?

However, the Finance Ministry pointed out that the tax reduction will only have the desired effect if it is passed on to consumers, i.e. if supermarket prices really do fall. 

In the run up to July 1st, businesses said they were concerned the reduction could involve additional expenditure because of new calculations and labelling. Some critics believe this too bureaucratic and therefore say that the lower value added tax should apply for a period longer than six months to make it worth the effort.

However, the government has stressed that new labelling on products is not needed and the discount can be applied at the till.

READ ALSO: How Germany's new multibillion aid package will benefit you

Who will it benefit?

This step is intended to relieve the burden on low-income earners in particular, as VAT is often the only tax they pay in a large amount. It will cost the federal government around €20 billion.

The big question is whether the reduction will really bring the expected increase in consumption – or whether many people will wait until the crisis is over before lots of purchases.

When it comes to buying food, the reduction will often only work out at a few cents less. Tax cuts will make a bigger difference for large purchases such as washing machines – but not everyone can afford them.

What's the reaction?

Opposition parties say only certain people will benefit from the action.

Dietmar Bartsch, leader of The Left (Die Linke) parliamentary group, told German newspaper the Neue Osnabrücker Zeitung that the tax cuts would only benefit the people who can actually afford big purchases, like new washing machines and other appliances.

“The coalition government has introduced a purchase premium through the back door here – a Porsche rebate,” Bartsch said.

FDP (Free Democrats) deputy faction leader Christian Dürr said: “People will hardly feel the benefit of the VAT reduction.”

The VAT is displayed on receipts. Photo: DPA

READ ALSO: Is Germany doing enough to ensure small businesses survive the coronavirus crisis?

What is VAT anyway?

Companies must add value added tax (VAT) to their prices. The tax is then transferred to the tax authorities on a monthly, quarterly, or annual basis.

According to EU law, EU Member States are required to levy a standard VAT rate of at least 15 percent and a reduced rate of at least 5 percent

In Germany the VAT rate of 19 percent is just below the European average of about 21 percent. A reduced rate of 7 percent applies to certain consumer goods and everyday services (such as food, newspapers, local public transport and hotel stays). Some services (such as bank and health services or community work) are completely VAT exempt.

The official German term for VAT is Umsatzsteuer (USt), but it was originally called Mehrwertsteuer (MwSt) and is often still referred to by this name.

What else is this the government planning when it comes to tax and business?

Small and medium-sized companies, which are particularly affected by the crisis, are to receive special bridging aid until August in a bid to keep them afloat.

The federal government is setting aside a total of €25 billion for this purpose. It will go to hotels, restaurants, clubs, bars, travel agencies, entertainers, and also professional sports clubs in the lower leagues.

Meanwhile, several tax breaks are also planned for business owners.

How did it happen so quickly?

In order for the amendments to take effect on July 1st, the government moved quickly.

The Bundestag and Bundesrat approved the motion at a special session on June 29th.

Member comments

  1. Your article on the proposed VAT explains why food items in my area (Kreis Altenkirchen) have suddenly increased in price by about 10%.

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LIVING IN GERMANY

Living in Germany: Battles over Bürgergeld, rolling the ‘die’ and carnival lingo

From the push to reform long-term unemployment benefits to the lingo you need to know as Carnival season kicks off, we look at the highlights of life in Germany.

Living in Germany: Battles over Bürgergeld, rolling the 'die' and carnival lingo

Deadlock looms as debates over Bürgergeld heat up 

Following a vote in the Bundestag on Thursday, the government’s planned reforms to long-term unemployment benefits are one step closer to becoming reality. Replacing the controversial Hartz IV system, Bürgergeld (or Citizens’ Allowance) is intended to be a fair bit easier on claimants.

Not only will the monthly payment be raised from €449 to €502, but jobseekers will also be given a grace period of two years before checks are carried out on the size of their apartment or savings of up to €60,000. The system will also move away from sanctions with a so-called “trust period” of six months, during which benefits won’t be docked at all – except in very extreme circumstances. 

Speaking in parliament, Labour Minister Hubertus Heil (SPD) said the spirit of the new system was “solidarity, trust and encouragement” and praised the fact that Bürgergeld would help people get back into the job market with funding for training and education. But not everyone is happy about the changes. In particular, politicians from the opposition CDU/CSU parties have responded with outrage at the move away from sanctions.

CDU leader Friedrich Merz has even branded the system a step towards “unconditional Basic Income” and argued that nobody will be incentivised to return to work. 

The CDU and CSU are now threatening to block the Bürgergeld legislation when it’s put to a vote in the Bundesrat on Monday. With the conservatives controlling most of the federal states – and thus most of the seats in the upper house – things could get interesting. Be sure to keep an eye out for our coverage in the coming weeks to see how the saga unfolds. 

Tweet of the week

When you first start learning German, picking the right article to use can truly be a roll of the “die” – so we’re entirely on board with this slightly unconventional way to decide whether you’re in a “der”, “die”, or “das” situation. (Warning: this may not improve your German.) 

Where is this?

Photo: picture alliance/dpa | Boris Roessler

Residents of Frankfurt am Main and the surrounding area will no doubt recognise this as the charming town of Kronberg, which is nestled at the foot of the Taunus mountains.

This atmospheric scene was snapped on Friday morning, when a drop in temperatures saw Kronberg and surrounding forests shrouded in autumnal fog.

After a decidedly warm start to November, the mercury is expected to drop into single digits over the weekend. 

Did you know?

November 11th marked the start of carnival season in Germany. But did you know that there’s a whole set of lingo to go along with the tradition? And it all depends on where you are. First of all, the celebration isn’t called the same thing everywhere. In the Rhineland, it’s usually called Karneval, while people in Bavaria or Saxony tend to call it Fasching. Those in Hesse and Saarland usually call it Fastnacht. 

And depending on where you are, there are different things to shout. The ‘fools call’ you’ll hear in Cologne is “Alaaf!” If you move away from Cologne, you’ll hear “Helau!” This is the traditional cry in the carnival strongholds of Düsseldorf and Mainz, as well as in some other German cities.

In the Swabian-Alemannic language region in the southwest of the country, people yell “Narri-Narro”, which means “I’m a fool, you’re a fool”. In Saarland at the French border, they shout “Alleh hopp!”, which is said to originate from the French language. 

Lastly, if someone offers you a Fastnachtskrapfe, say yes because it’s a jelly-filled carnival donut. And if you’re offered a Bützchen? It’s your call, but know that it’s a little kiss given to strangers!

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