Last updated on 03/11/2020
As part of the economic stimulus package, the federal government has decided to lower VAT. What does that mean? And what is VAT anyway?
The VAT rate of 19% or the reduced rate of 7% has applied in Germany for over 13 years. As of July 1, 2020, the VAT rate is to be reduced again to 16% and 5%. For consumers, this may mean a reduction in the cost of living. The planned reduction confronts companies with major tasks.
Value added tax – sales tax: what is what?
With the sales tax businesses need tax services and goods deliveries. It always arises when services are provided or goods are sold in Germany. Companies are obliged to levy and show sales tax of 19% or the reduced rate of 7% on their invoices. The company pays the collected tax to the tax office. Conversely, companies entitled to deduct input tax deduct the VAT they have paid themselves, so they are reimbursed by the tax office. As a consumer, you hardly notice anything of this process. You pay the price shown in the store or online. You will not be reimbursed for sales tax.
And what is the VAT?
The answer is simple: the same. Value added tax is the slang term for the sales tax that a company charges on services and the input tax that it pays itself. Both terms mean the same type of tax only from different perspectives. In common parlance, the term value added tax combines the different names. The online tax services are important.
What is the current tax rate?
Take a closer look at your receipt after your next purchase. You will find the VAT shown below. Some items are taxed at 19%, others at 7%. It is not so easy to distinguish which goods or services are taxed at which tax rate. Roughly speaking, the reduced tax rate applies, for example, to sports and cultural events as well as basic food such as milk or bread. Here, too, there are subtle differences. While 7% is currently still charged on cow’s milk, it is 19% on soy milk.
What does the reduction mean for consumers?
It depends on how companies will deal with the VAT cut. If the price remains the same, it is a (hidden) price increase. The customer pays the same as before, so they don’t notice a difference. However, the company has to pay less VAT on the sales price and thus makes a plus. Many large companies have already pledged to pass the reduced VAT on to customers and therefore lower sales prices. Due to the percentage but small reduction, this will be more noticeable in high-priced goods and trades. With a bag of milk at 99 cents, the savings of 2 cents will hardly be noticeable in the wallet.
“We give you the VAT”
What is actually behind this advertising promise? For the customer, the discount campaign means a discount of 19% or 16% soon. But it is not in the power of a company to forego VAT. From the reduced purchase price, dealers still have to identify and pay the applicable VAT. How long it will actually be 16% in the future remains to be seen. In any case, this promotion would initially give the customer a lower discount.