Germany plans to slash VAT on gas bills to seven percent

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.”