The Czech five-party government coalition has successfully pushed through a significant consolidation package in the lower house of parliament, representing a key step in efforts to balance the state’s finances by approximately CZK 150 billion over the next two years. The consolidation package introduces several measures that impact taxation, public finance, and other areas of the economy.

One of the central features of the package is the introduction of a two-tier VAT (Value Added Tax) rate, with rates set at 12% and 21%. The lower rate will predominantly apply to food, while certain services and draft beer will move to the higher rate. Additionally, corporate tax will increase from 19% to 21%, a move aimed at bringing the domestic rate closer to the European average and generating an estimated CZK 22 billion annually for the state.

The consolidation package also involves raising property tax by 1.8 times on average, with gradual increases in line with inflation. This additional revenue will be allocated to municipalities. Furthermore, excise duty on alcohol will see a 10% increase next year, followed by 5% increases in each of the two subsequent years.

A notable aspect of the package is the change in the VAT rate for various goods and services. While food, printed newspapers, and funeral services will fall under the reduced rate, hairdressing services, draft beer, and municipal waste transport and dumping will be categorized under the higher rate. The government has justified these changes by indicating that, in many cases, the reasons for keeping items at a reduced rate no longer apply, such as those related to the COVID-19 pandemic.

The consolidation package also reintroduces a 0.6% levy on employees’ health insurance, abolishes certain tax exemptions, and restricts allowances for spouses with no income unless they are caring for a child up to the age of three. Additionally, it increases employee benefits’ income tax exemption to up to half of the average wage, providing employees with tax-free benefits up to CZK 1,832 per month.

Motorway vignettes will become more expensive from March 2024, with the annual vignette price increasing from CZK 1,500 to CZK 2,300, and subsequent increases to align with inflation from 2025 onwards. A new one-day vignette option will also be introduced.

The package includes measures to provide municipalities with more revenue from truck congestion fines, raising the share from 15% to 30%. It also adjusts truck tolls based on emission class, with emission-free vehicles running on electricity or hydrogen being subject to a zero rate.

The consolidation package’s passage represents a significant achievement for the government, which aims to strengthen the state’s financial position and address structural deficits in the state budget. It was approved by 108 MPs in the 200-seat Chamber of Deputies, with support from the coalition MPs and independent deputy Ivo Vondrak. However, the package faced strong opposition from parties like ANO and the far-right Freedom and Direct Democracy (SPD). While the government views these changes as vital to the country’s economic stability, the opposition has criticized the package, citing concerns about inflation and potential damage to economic growth.

The package’s implementation is expected to have a substantial impact on the country’s finances and economic landscape and has generated extensive debate and discussion among policymakers and the public.

Article by Prague Forum