In order to mitigate effects of price increase in Poland, the government announced actions that include a 0% VAT on food items despite European laws, but not on all energy products.
On January 11, Poland's Prime Minister Mateusz Morawiecki released more measures to protect its citizens from inflation reaching levels not seen since 2000 with a year-on-year 8.6% price increase in December.
Since December, authorities have been working on an Anti-Inflation Shield to mitigate the impact of inflation on the population. The objective is to protect 7 million households from the increase of energy prices. The new budget for the updated Anti-inflation Shield 2.0 amounts to at least PLN 15 billion (US$3.7bn).
Poland will spend PLN 4 billion ($1bn) to provide a minimum monthly allowance of PLN 400 ($100) per person to the low and middle income households.
Moreover, the government announced implementing a VAT reduction on energy for six months, from 23% to 8% for fuel, and from 23% to 5% for electricity and heating. Poland removed excise duties, too. Regarding natural gas for individual consumers, the government wants to reduce VAT to 8% until February and then to 0%.
Polish bill also removes the 5% VAT applied on most food items for six months, which is expected to save PLN 45 ($11) for each family every month and cost PLN 6-7 billion ($1.5-1.7bn) to the state.
Fertilizers will not be submitted to VAT for six months either because they are highly affected by gas price increases according to the government.
0% VAT on energy prices proposed to the European Commission in December
On December, the prime minister thought there was a "high probability" the exemption on food would be approved by the European Commission. In fact, a member state needs to submit a request to the European Commission before applying a VAT exemption.
But the Commission did not seem to approve Poland's request to completely remove VAT on the supply of fuel, electricity or heating. Whether the Commission agreed that Poland strips off VAT from gas prices remains unclear at the moment though.
Poland wanted to have 0% VAT on natural gas, electricity or heating for six months from January 1 to June 30, 2022. Poland Minister of Finance Tadeusz Kościński sent the request on December 16 to the European Commission.
The current temporary VAT regulations down to 5% or 8% can be enforced. They are in line with European laws since the European Commission allows for reduced VAT down to 5% on energy.
But the Commission wants to follow guidelines to meet climate change objectives.
In fact, a new tax reform was unanimously approved by all EU Finance Ministers on December 7. The new VAT reform, which started to be discussed in 2018, offers more flexibility to member states on VAT rates.
A new VAT reform, but in line with EU's Green Deal
Once the new VAT rules come into force, "member states will for the first time be able to exempt from VAT certain listed goods and services considered to cover basic needs", the press release mentions. Usual VAT needs to remain above 15% and weighted average VAT still needs to be above 12%.
As a consequence, for the first time member states will also be able to apply one reduced rate lower than 5%, or exempt a small number of items from VAT.
Poland therefore seizes the opportunity to adjust its VAT.
However, the tax structure also needs to support EU's Green Deal. In July, all EU member states pledged to become carbon neutral by 2050 and reduce carbon emissions by at least 55% by 2030 compared to 1990 levels. Minimum tax rates for heating and transport need to align with climate objectives.
As a consequence, the VAT reform excludes the possibility for countries to apply reduced rates and exemptions to goods and services deemed detrimental to the environment.
It de facto excludes 0% VAT for carbon-fueled energy, even if member states may still apply a reduced rate.
Gas price increase because of Russia and EU Climate policy
Nevertheless, the reform has still not been approved. The updated rules will be sent for consultation to the European Parliament on March 2022. Then, the legislation would come into force 20 days after its publication in the Official Journal of the EU if they are formally adopted by European lawmakers.
Poland's move on VAT is actually done before the European reform comes to force.
But on December, Commissioner Paolo Gentiloni told RMF that Brussels would not initiate an infringement procedure since the regulation becomes obsolete in a few months.
The European Union therefore most likely turned a blind eye for zero VAT on food items but not for energy.
During the press conference, the prime minister blamed "Russian gas manipulations as well as irresponsible, dogmatic EU climate policy". He also pointed out the spikes in demand due to the recent economic restart as the third reason explaining inflation.
Natural gas is often considered as a transition energy to clean power sources. And Poland seems to be anticipating a new taxonomy from the European Commission on gas as a transition energy complying with climate objectives. But that does not mean that a 0% VAT on gas will be accepted.
Update: The European Commission approved on February 2 a new taxonomy classifying gas a a transition energy but under some conditions.