VAT Act challenged as unconstitutional

  • 2009-07-29
  • Staff and wire reports

CASE CLOSED: Finance committee chairman Taavi Roivas is confident increase will stand.

TALLINN - The Riigikogu Committee on Finance refused its support for the proposal by the Chancellor of Justice, Indrek Teder, for abolishing amendments to the Value Added Tax Act, and calling for the VAT rate to be reduced back to its original 18 percent. The committee was split 50:50, reports news agency LETA. 

On June 18 the Parliament passed legislation increasing VAT from 18 to 20 percent, to come into force from July 1, just 6 working days after the decision.
The Estonian Association of SME's says that the regulators didn't consider the costs and administrative workload needed by the entrepreneurs and set an unreasonably short deadline to the amendment, which they say is clearly contrary with the principle of legitimate expectations [from government] and therefore probably illegal, reports

Teder assets that "increasing VAT so quickly was unconstitutional, with its short notice. According to the Constitution the state can't impose new regulations 'overnight' and 'violently'. The taxpayers must have time to become familiar with the new norms and rearrange their activities."
The committee's chairman, Taavi Roivas, said that as the votes of the committee members were divided equally, the proposal from Teder didn't have enough support for an overrule, and that this is the position he will bring to the Riigikogu plenary assembly on Aug. 3.

Roivas said that reinstating the current 20 percent VAT back to 18 percent is unreasonable and is not supported by entrepreneurs, and believes that "lowering the VAT rate back to 18 per cent would be the worst solution." He adds that "If we would have approved of [Teder's] proposal, it would have meant that we admit the inconsistency between the amendments to the Value Added Tax and the Constitution."

Roivas noted that the issue would then arise as to where to find in the State budget the 800 million kroons (51 mln euros) that were planned to be collected with the VAT rise.
The committee chairman then noted that the opinion of the chancellor is only one among many, referring to the fact that the Riigikogu Committee on Constitutional Affairs also took the position that the rushed changes pushed through on the VAT rate were not in violation of the Constitution; this was also the view of the president, as he approved the law.

The Law Society of Estonia supports the proposal made by the Teder, so that it would comply with the Constitution.
The society also expressed concern over the trends spreading in Riigikogu lately that are inappropriate for the country with the Rule of Law. They say that, in enforcing the rise in the value added tax without sufficient advance notice is violating the principle of legal certainty that has been guaranteed by the Constitution, violates confidence between the State and its citizens, and is an expression of the arbitrariness in execution of State power.

Roivas said that hopefully there would be a discussion at the Riigikogu meeting, during which some new solutions could be found to resolve the situation 's for example, on compensating the extra costs borne by entrepreneurs. He asserted the position that the Committee on Finance will not make any additional proposals in this field.
"Although we did not vote on it in the committee, a predominant majority of the committee was of the opinion that the worst possible option would be to turn back the law, in this situation and restore the value added tax rate to 18 per cent," he said.

The Chairperson of the Center Party faction, Kadri Simson, said that their proposal in the committee was to support the chancellor and to start with amendments to the law. "We see that a possible amendment would include adding transition provisions to the law as well as a certain compensatory mechanism for compensating for the damages caused by the excessively short advance notice of the rise in the value added tax rate," said Simson.

Reform Party member and chairman of the Parliamentary committee, Vaino Linde says that "We found that from a purely formal point of view, the Constitution does not prohibit the legislature to establish such a deadline for the entry into force of the law."
"We found, on the other hand, that the principle of legal certainty naturally demands that the legislative proposals be known to those subject to it early on, but in the current situation where the State is in the middle of an economic crisis, faster decisions have to be made," he added.