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How much will you save on products with Germany’s new VAT reduction?

How much will you save on products with Germany's new VAT reduction?
How much will you save in the last six months of 2020? Photo: DPA
From July 1st the VAT (value added tax) was reduced for six months, meaning many products will become cheaper. We looked at what that means for you.

When will VAT go down?

The standard VAT rate fell from 19 to 16 percent between July 1st and December 31st. The reduced rate, which applies to many foods and everyday goods, fell from seven to five percent.

It means lots of items in supermarkets, furniture stores, electrical stores and elsewhere are likely to become cheaper for six months.

Retailers are not obligated to pass on the discount to customers. However, lots of firms, such as supermarket retailers and Deutsche Bahn, have said that they plan to do this.

Retailers may change their price labels to reflect the discount or apply it at the till.

Why is it happening?

The measure is part of an aid package aimed at boosting the economy after the coronavirus pandemic shutdown. It is hoped by reducing value added tax to products, consumers in Germany will simply buy more to get the economy moving.

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

 

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.

“The aim is for citizens to make a possible purchase decision now and not to postpone it until next year or the year after,” said Federal Finance Minister Olaf Scholz.

When it comes to buying food, the reduction will often only work out at a few cents less. But the tax cut will make a bigger difference for large purchases such as washing machines.

How much of an impact will it have?

Savings on everyday products will remain small but for larger purchases there will be a noticeable difference.

If a car previously cost €30,000, for example, the customer could in theory only have to pay €29,243.69 from July – in other words, around €750 less.

READ ALSO: What you should know about Germany's planned VAT cut

As well as citizens, the reduction will also benefit companies in all sectors, from gastronomy to the automotive industry, according to the government.

Here's some possible savings on products:

1 litre milk 3.5 percent fat – current market price: 79 cents – possible saving: 2 cents

VW Golf, basic model – current market price: €19,995 – possible saving: €504 

Levis ladies jeans – current market price: €85 – possible saving: €2.14

Fuel tank Golf E10 (50 litres) – current market price:  €58.37- possible saving: €1.47 

Billy bookshelf Ikea – current market price: €79 – possible saving: €1.90

Blood sugar measuring device Salter – current market price:  €39.99 – possible saving: €1.01

Garden shears Gardena – current market price:  €11.86 – possible saving: 30 cents

Nivea Skin Cream – current market price:  €1.16 – possible saving: 3 cents

Canon Camera 2000D – current market price:  €329 – possible saving: €8.29 

According to German news site Merkur, which analysed the VAT reduction plans, there could also be savings on other products such as bicycles, lamps or furniture (these products have a standard rate).

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

The reduced rate applies to some foods, medical supplies, domestic transport, books, tickets to cultural events, flowers, e-books, audiobooks and periodicals, and short-term hotel accommodations.

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.


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