New Law Out to Reduce the VAT
The law to reduce the VAT rate by 5% will cover purchases of the main housing with specifications as noted below taking in to consideration the square metres and the value of the individual purchase.
Apartment/house with a total area of up to 130 square meters and is valued at 350.00 a VAT rate of 5% is charged.
Apartment/house with total area from 130 sq.m. to 190 sq.m., and VAT rate of 19% is charged for square meters exceeding 130 sq.m.
For apartment/houses valued from 350.000€ to 475.000€, a VAT rate of 5% and VAT of 19% is applied on the amount exceeding the threshold of 350.000€
For an apartment/house above 190 sq. m., VAT rate of 19% is charged on the total area. For an apartment/house over 190 sq.m and/or worth more than 475.000€, the standard VAT rate of 19% is applied to the entire price.
The above restrictions have been adjusted for persons with disabilities and large families with many children.
Real Estate Industry that obtained or planning Permission application has been or will be submitted by the 31st of October 2023 is excluded.
A duly completed application for the application of the 5% VAT rate was / will be submitted within three years from the date of entry into force of the new law (i.e. the application must be submitted before 06/15/2026)
VAT Down to 5% on certain purchases
Cyprus, like many other countries, utilizes Value Added Tax (VAT) as a significant source of revenue. The VAT rate in Cyprus has traditionally been set at various levels depending on the goods and services, with the standard rate being 19%. Recently, however, a new legislative proposal has been put forth to reduce the VAT rate to 5% on certain purchases. This move has sparked discussions among policymakers, businesses, and consumers about its potential impacts on the economy.
Rationale Behind the VAT Reduction
The primary rationale behind reducing the VAT rate to 5% on certain purchases is to stimulate economic activity and support household incomes. By lowering the cost of goods and services, the government aims to increase consumer spending, which can, in turn, drive economic growth. This is particularly pertinent in the context of economic challenges, such as those brought about by the COVID-19 pandemic, which saw a significant downturn in economic activities and consumer spending.
Another critical reason for this legislative change is to support specific sectors that are deemed crucial for the economy but have been struggling. For example, the hospitality and tourism sectors in Cyprus, which are vital for the economy, have been severely impacted by the pandemic. Reducing the VAT rate on services in these sectors can help make Cyprus a more attractive destination for tourists and encourage local spending.
Expected Benefits
Economic Stimulation: A reduced VAT rate is expected to leave more disposable income in the hands of consumers, potentially increasing overall demand for goods and services. When consumers spend more, businesses experience higher sales volumes, which can lead to job creation and higher profits. This economic stimulus can have a multiplier effect, benefiting multiple sectors of the economy.
Support for Vulnerable Sectors
By targeting specific purchases, the VAT reduction can provide direct support to sectors that are essential for economic recovery. For instance, if the reduction applies to food, healthcare products, or essential services, it can alleviate the cost burden on households, particularly those with lower incomes, thus improving their quality of life.
Competitive Advantage
Lowering VAT on certain goods and services can make Cyprus more competitive compared to other European destinations. This competitive edge can attract more tourists and investors, contributing to a positive cycle of economic growth and development.
Potential Challenges
Fiscal Impact: One of the main challenges of reducing the VAT rate is the potential decrease in government revenue. VAT is a significant source of income for the state, and a reduction could lead to a budget deficit unless offset by other means. This shortfall may necessitate either increasing other forms of taxation or cutting public spending, both of which can have negative consequences.
Implementation and Compliance
Implementing a new VAT rate can pose administrative challenges for both the government and businesses. Ensuring that all entities comply with the new rate and correctly apply it to eligible purchases requires substantial oversight and resources. Businesses may face additional costs in updating their systems and training staff to accommodate the new tax rate.
Economic Inequality
While the VAT reduction aims to benefit all consumers, there is a risk that it might disproportionately benefit higher-income households who have more disposable income to spend. To address this, the government might need to design complementary measures that ensure equitable benefits across different income groups.
Conclusion
The proposal to reduce the VAT rate to 5% on certain purchases in Cyprus is a strategic move aimed at stimulating economic growth and supporting vulnerable sectors. While the potential benefits in terms of increased consumer spending and sectoral support are significant, the government must carefully navigate the fiscal implications and ensure effective implementation. If managed well, this legislative change could provide a much-needed boost to the Cypriot economy, fostering resilience and long-term growth in a post-pandemic landscape.
