Amendment would boost more VAT rates to 22%
Though domestic consumers already pay 22% value-added tax (VAT) on nearly everything they buy, a draft amendment in Parliament would push VAT rates on other products and services to the same level.
The increases would most likely affect such goods and services as medicines, books, unprocessed foods, baby clothes, new homes and dry cleaning, sources said. A trip to the dry cleaner, for instance, today taxed at 7%, would jump immediately to 22% while baby clothing, currently also at 7%, would see 5% yearly increases until hitting 22% in 2003. Everything else is pretty much already covered by 22% VAT, said Mateusz Szczurek, an economist with ING Barings. "Because of that, I don't think that this would severely affect the economy," he said.
One sector of the economy has expressed worries, however. Construction companies are concerned the tax hike could lead to a recession in the housing market. Szczurek, for his part, believes the proposed scrapping of tax deductions for homebuyers would dissuade more potential buyers than VAT increases.
Radek Szczech, a tax manager with Arthur Andersen Polska, said that though tax hikes in the construction industry could translate into more expensive flats, a market recession isn't a certainty.
Ownership titles for flats, which are granted by housing cooperatives in Poland, would become taxable under the proposed amendment, Szczech said. "If we're taxing the receipt of a legal title, that will also allow cooperatives to recover VAT," he said, thus providing an incentive to reduce prices.
Under the current scenario, the 7% VAT that homebuilders pay for materials is usually reflected in asking prices, since it cannot be recovered by the seller. These rates would increase 5% yearly until 2003 according to the proposed legislation, but builders would also be able to begin recovering liabilities from ownership titles. VAT on the currently non-taxable titles would start at 7% in 2001 and go to 17% in 2002 and 22% in 2003.
VAT passes the tax burden on to the final purchaser, allowing a liability the difference between input and output taxes to be recovered. If a store purchases a product for $100 at 22% VAT and sells it for $150 at the same tax rate, it only gets taxed on the difference. Since the store pays $22 in taxes and the buyer $33, the store only pays $11 in taxes in the end, which in this case is covered by the buyer.
The proposed changes to VAT law also add muscle to Poland's efforts to be ready for European Union (EU) accession by 2003. The EU requires its member states to administer 15-25% VAT on goods and services, Szczech said.
