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The consumer-linked value-added tax (VAT) has gone up by one percentage point to 18% from Monday, the second hike in ten months, with a further increase expected in 2014, in a desperate effort to raise funds for the bankrupt Cyprus economy.
Moody's slashed Cyprus by three notches to Caa3 last week, taking it further into "junk" territory, and warned it could be downgraded again.
The rating agency predicted the country's debt pile would continue to rise because of the capital needs of its banks, burned by their exposure to crisis-wrecked Greece, and said it saw an even chance of default.
But the communist government said it was hopeful it would secure a bailout, probably up to 17.5 bln euros, to recapitalise the banks and pay down its runaway public sector debt.
VAT is the only short-term fund raising method deemed necessary to pay the civil service payroll a month before critical presidential elections, while the administration has already sucked some 240 mln euros from the profits of state-owned power and telecom utilities.
The Troika of international lenders – European Commission, European Central Bank and International Monetary Fund – are urging the government to reduce its public spending and privatise some of its profitable state-owned enterprises.
VAT was hiked from 15% to 17% in March 2012 and is expected to rise from 18% to 19% on January 1, 2014.
Lower VAT sectors, such as transport, food, hotels and medicine will remain unchanged, for now, but the reduced rate is expected to rise from 8% to 9% in 2014. Zero-rated products will remain unchanged. Spirits, beer and wine are already charged the full VAT rate, at 18%.
Aready, a 7-cent consumer tax on fuel (8.2c including VAT) was imposed in early January, raking in millions in fresh revenue as a shortage scare at petrol pumps, supposedly because of an industrial dispute, pushed thousands of motorists to fill up their tanks in the wake of a national strike. Eventually, the strike only lasted six hours, while some petrol station owners abstained.
Higher taxes have also been imposed on rolled tobacco and spirits. Milk is now more expensive by 4c a litre wholesale (from 49.7c to 53.7c), with the retail prices expected to go up on January 15 by 12c to 1.46 euros a litre.
