Germany plans to slash VAT on gas bills to seven percent

The EU Commission has blocked plans to dispense with VAT on gas bills. Instead, Germany will drop the tax rate from 19 to just seven percent.

Gas metre in German household
Gas usage in a German household is depicted on a gas metre. Photo: picture alliance/dpa | Bernd Weißbrod

Following the EU Commission’s rejection of a simple VAT exemption for the new gas levy, the German government has announced plans to slash the VAT rate to seven percent to ease the pressure of rising energy costs on households. 

The step will relieve gas customers significantly more than they were burdened by the state gas levy, Chancellor Olaf Scholz said on Thursday.

The SPD politician said he expected the companies to pass the tax reduction on to consumers directly. “This is another step towards relieving the burden,” he added.

He also reiterated a pledge to deliver further relief measures for households in autumn. 

“The question of social justice is decisive in order for the country to remain united in this crisis,” Scholz said.

To ease the weight of the forthcoming gas levy, the government had originally wanted to remove the obligation to pay 19 percent VAT entirely.

However, Brussels confirmed that scrapping VAT completely would be impossible under the EU’s strict competition laws.

“In principle, there is no possibility of an exemption from this tax,” Commission spokesman Danny Ferry told Tagesschau on Wednesday. “We are in very close contact with the German government to find solutions here that will benefit people in Germany and have the same effect in the end.”

READ ALSO: What is Germany’s new gas ‘tax’ and who will pay it?

Earlier in the week, Trading Hub Europe had revealed that the gas levy would be set at 2.419 cents per kilowatt hour of energy. According to initial estimates, a one-person household with an annual consumption of 5,000 kilowatt hours would see their bills rise by €121 euros without VAT due to the levy.

For a family household with an annual consumption of 20,000 kilowatt hours, the additional costs without VAT would be around €484 per year.

With the full amount of VAT included, the real cost of the levy would have risen to 2.879 per kilowatt hour of energy.

The tax cut will run until the end of March 2024, the same time the gas levy is due to expire.

Criticism of the levy

The levy is intended to compensate gas suppliers for their additional costs in light of Russia’s war on Ukraine and subsequent weaponisation of the energy crisis.

So far this year, German gas giant Uniper has posted around €12.3 billion in losses due to the scarcity of cheap Russian gas and the need to top up gas supplies elsewhere at a premium.

The gas levy is part of a rescue package for these struggling energy companies, but the plan has been criticised for not spreading the burden more evenly across society.

READ ALSO: EXPLAINED: How much will Germany’s gas levy cost you?

According to Professor Martin Booms, director of the Academy for Social Ethics and Public Culture in Bonn, a fairer way to bail out the gas firms would be through taxation.

The levy is intended to prevent the “systemic collapse of the gas supply”, Booms told WDR. This concerns the whole of society – not just gas customers “who happen to be unlucky enough to be in a rented flat that is heated with gas”.

For this reason, Booms considers taxation to be a more just solution.

“If everyone participates – namely by paying taxes – the burden is lower for each individual,” he said. “That is a very big advantage. Especially for those who are hit the hardest.”

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How the cost of living crisis is affecting people in Germany

Energy and some supermarket items in Germany are rising in price much faster than the overall inflation rate - and that has more than half of German households worried about their budgets, a new survey shows.

How the cost of living crisis is affecting people in Germany

What’s happening?

With the cost of everyday items spiralling upwards, many people in Germany are feeling the strain. And a new survey has laid bare the impact on people.

Around 57 percent of people in Germany say rising prices are a “big problem” for them personally, according to a recent poll.

That’s a marked increase from July, when public broadcaster ZDF asked the same question and found that only 40 percent of respondents were concerned about rising costs at that time.

In some cases, energy prices have more than doubled.

The price of natural gas – which around half of German households use for heat – has quintupled in some cases.

READ ALSO: German households see record hikes in heating costs

What else is going up in price?

It’s not just the price of energy that’s rising steeply. Anyone who has gone to buy groceries in the past months will have noticed a major increase.

One analysis from Focus news magazine found that the price of several common supermarket items had rocketed upwards once more, with many grocery stores and discount retailers having increased their prices on October 1st to adjust to higher costs on their end.

At a 65 percent increase, sugar saw one of the biggest price hikes. The price for a kilogram of powdered sugar specifically, doubled.

Butter biscuit prices – a common snack in Germany – are up 20 percent, while coffee cream and honey both increased by 30 percent.

The price of ketchup climbed by 50 percent.

Goose leg and goose breast – typical German delicacy for holidays like Christmas – doubled in price to over €20 in some Munich shops, due to higher feed and transport costs recently.

57 percent of Germans reported that price increases were becoming a “big problem” for them in September 2022. Poll by ZDF.

What does this mean for people?

Those increases are far above the German inflation rate. Currently sitting at around 7.9 percent, the country’s inflation rate has broken post-war records several times already this year.

But one study finds many Germans feel – and act – as if the rate is much higher.

According to an Internationale Hochscule study done exclusively for the Welt newspaper, the Inflationsgefühl – or what respondents feel the inflation rate is actually like – sits at 34 percent.

Just over half those surveyed in that study reported they were “very concerned” about rising prices. Meanwhile, 37 percent said they are “somewhat concerned”.

Over 80 percent expect the problem to get worse.

Study authors say people in Germany may be overestimating the rate of inflation because the biggest increases are in areas they’ll tend to notice every day.

“We always perceive inflation where we have consumer spending,” International Hochschule Business Administration Professor Johannes Trey told Welt. “People are interested in what they have to pay every day to meet their basic needs.”

Most respondents say they’re planning on cutting spending in certain areas, with cuts in purchases for furniture, appliances, and travel the most popular cost saving measure. Around 80 percent say they’re making an effort to curb their electricity use.

READ ALSO: EXPLAINED: When should I turn on my heating in Germany this year?

Respondents are less likely to cut down on luxuries such as alcohol and tobacco—or media consumption like buying newspapers or streaming subscriptions.

Support for Ukraine still high despite price pressure

Although the financial stress people in Germany are experiencing has gone up, the general level of support for Ukraine among everyday Germans is still high – despite the war being one of the main causes of the record high inflation levels.

ZDF’s poll asked “should we keep supporting Ukraine even though it means higher prices for us?”

And 74 percent said “Yes” in September.

Although the upcoming winter is expected to come with even more financial strain, that number has trended slightly upward over the last three months.

Despite more than half of German households saying they’re under financial stress, most say support for Ukraine should continue. Poll by ZDF.

Meanwhile, the federal government is currently preparing a new €200 billion package of support, on top of the €100 billion already passed by the Bundestag over the last few months.

The package is expected to provide inflation relief by introducing everything from a temporary cap on the price of gas to a successor to summer’s €9 nationwide public transport ticket.

READ ALSO: Germany to thrash out details of €200 billion energy support package