TALLINN - The Estonian government has come under heavy criticism from business leaders for increasing VAT from 18 percent to 20 percent, only giving the country six working days to implement the change.
The government 's which is desperate to manage its budget at no more than a 3 percent deficit 's has decided to implement an almost immediate tax hike that has left many businesses in turmoil.
The fact that the VAT rate increase was adopted and will take effect on July 1 is outrageous, says EVEA, an association of small and medium sized enterprises.
"Such a rush in changing the tax system is unheard of and ridiculous," EVEA representatives said.
"It shows that legislators have no idea of how much time and effort is involved in changing the accounting and cash systems, bookkeeping procedures, re-labeling of goods and changing of price lists."
"What is worse is that this tax change was forced through by two parties that have for years preached about the importance of having a stable tax system and have been enjoying the support of businesses," said EVEA.
Estonian department store group Tallinna Kaubamaja said that it would have to replace 180,000 price labels because of the 2 percent VAT rate increase from July 1, reported ERR.
"No-one can replace 180,000 price labels in just six days," said Enn Parel, sales and marketing manager of Tallinna Kaubamaja.
Parel said that they were considering whether to put up signs warning buyers that actual prices will differ from those shown on the labels.
The company has already contacted the consumer protection authority for advice on how to inform the customers about new prices in the situation where some price labels still show the old prices.
Parel said that the department store has not yet decided how much its prices will increase. "But increase they will," he said.
According to the government, the 2 percent increase in VAT would raise 800 million kroons (51 million euros) in additional revenue.
Viktor Trasberg, who teaches economics in Tartu University, is critical of the government's plans to increase consumption taxes of which VAT is a key element.
The Estonian government is doing the same that the IMF did in Latvia, he said.
"In Latvia, the extremely incompetent recommendations of the IMF to increase consumption taxation and decrease income tax put the Latvian economy into a state of coma. It seems that we will do the same in Estonia, but without the help from the IMF," he stated in Eesti Paevaleht.
"While in the EU, direct and indirect taxes are about 50-50, in Estonia consumption taxes make up 64 percent of the total. At the same time the Estonian tax burden including social insurance payments was 34.2 percent of GDP last year, while the EU average was over 40 percent."
Trasberg said "that a VAT rise and higher excise duties will force people to consume even less. This will mean lower demand for goods, tourism and hotel services."
"Instead of increasing indirect taxes, Estonia should increase direct taxation such as corporate income tax," he said, adding that zero income tax on reinvested profits has taken Estonia to the brink of bankruptcy and allowed foreign companies to expatriate billions in profits earned in Estonia.
"We must admit to ourselves that our current tax system is bankrupt, it does not ensure sufficient tax revenues and is not able to influence the economy, nor increase social integration," concluded Trasberg.
Prime Minister Andrus Ansip defended the increase in VAT at a government press conference and expressed his opinion that higher VAT doesn't decrease consumption remarkably, E24.ee reported
"I don't share the opinion of those people who say that higher VAT in Latvia and Lithuania reduced turnover in these countries remarkably. That is not true and one shouldn't think of that of Estonia," Ansip said.
The opposition Center Party did not agree. The party claimed that raising VAT would sharply increase the price of consumer goods and make Estonia more like Latvia.
Speaking to Aripaev, Vilja Savisaar, chairman of the Center Party's faction in the Estonian parliament has said that "the government was paying little attention to what happened in Latvia in a similar situation."
She continued that there was "no doubt that a VAT rate increase would push up the price of consumer goods. I cannot imagine what the benefit is of increasing the price of bread and milk during an economic crisis. It will not create any jobs nor help us overcome this economic crisis sooner."
"This would be a bad decision for those who earn less than Estonia's average wages. At the same time it would be good news for high earners, since primary goods make up a smaller part of their daily purchases," she said.
She concluded "Latvia's problems started when it decided to increase its VAT rate. The results were dismal, tax revenues fell sharply. Estonia today is still in a better position than Latvia. For me it is strange why Ansip wants to make us more similar to Latvia."