Germany to slash VAT on gas sales to cushion price shock

Germany has unveiled plans to cut tax on natural gas sales to soften the blow of soaring energy costs for many households by offsetting the impact of a new gas levy that starts in October.

Chancellor Olaf Scholz announced the cut in value added tax on gas sales from 19 per cent to 7 per cent on Thursday, telling reporters that more measures would be announced in the coming weeks to deal with Germany’s mounting energy crisis.

“The question of justice is crucial for the country to stick together in this crisis,” Mr Scholz said, adding that gas suppliers should pass on the tax cut in full to their customers. “You’ll never walk alone,” he said, repeating his often-used mantra.

The move will lower energy costs for German households and reduce inflationary pressures in the economy, but it is also likely to dilute the incentive provided by higher prices to reduce consumption.

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German authorities aim to cut total gas usage by a fifth this year to avoid having to ration supplies for heavy industrial users if Russia keeps throttling its gas flows to Europe.

“Reducing VAT on gas prices is really counterproductive,” said Klaus Adam, economics professor at the University of Mannheim. “It’s never a good idea to mess with the price mechanism. It’s better to subsidise in a targeted fashion and according to need with lump sum transfers.”

The VAT cut will come into effect in October and offset the impact of an extra levy starting at the same time that was announced earlier this week and will add 2.419 cents per kWh to gas bills to compensate suppliers for sharply higher wholesale prices.

Jörg Krämer, chief economist at German lender Commerzbank, estimated the move would reduce German inflation by 0.3 percentage points. – Copyright The Financial Times Limited 2022