(Bloomberg) -- Germany will temporarily cut sales tax on natural gas to 7% from 19% to ease the burden on households and companies suffering due to surging energy costs and hit by a new levy taking effect in October.
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Chancellor Olaf Scholz announced the move -- which could cost about 14 billion euros ($14.2 billion) in lost revenue -- in a brief statement to reporters Thursday in Berlin and said the government expects suppliers to pass the VAT reduction fully on to consumers. The lower rate will apply from Oct. 1 and expire at the end of March 2024.
"With this step, we are reducing the burden for gas customers overall much more than the burden created by the gas levy," Scholz said. "This reduced VAT rate will apply as long as the gas levy is collected."
The government is imposing the levy on gas consumers to help fund compensation for importers forced to pay higher prices due to Russia squeezing gas deliveries via the Nord Stream pipeline. If any of Germany's suppliers went bust, it could trigger wider disruption in energy supplies to Europe's biggest economy.
Both Scholz and his deputy, Economy Minister Robert Habeck, have accused Russian President Vladimir Putin of weaponizing energy, and Habeck blames the Kremlin for creating what he calls an "artificial shortage" that has driven up prices.
The government's decision to cut the rate of VAT on gas needs to comply with European Union rules. Economy Commissioner Paolo Gentiloni indicated before Thursday's announcement that a reduction as low as 5% would be compatible with the bloc's sales-tax directive, according to an Aug. 17 letter seen by Bloomberg that Gentiloni wrote to German Finance Minister Christian Lindner.
"Since a direct tax exemption is not possible under European law, a temporary reduction in VAT on gas is logical," Habeck said Thursday in an emailed statement.
Cutting sales tax could cost the government roughly 14 billion euros, according to an estimate by Sebastian Dullien, director of the IMK economic research institute. It will also slice about 0.7 percentage points off Germany's inflation rate in the final three months of this year, Dullien said in a series of tweets.
Due to take effect from Oct. 1 and expire at the end of March 2024, the new gas levy was set this week at 2.4 euro cents per kilowatt hour. It will boost energy bills for both corporate customers that use gas in production processes and for households already suffering from soaring heating and food costs.
The income from the new charge will be used to offset additional costs incurred by gas importers, 12 of which have already applied for compensation of about 34 billion euros, according to the economy ministry.
Uniper SE, which on Wednesday reported a loss of more than 12 billion euros for the first half, accounts for more than 50% of the total, according to Chief Executive Officer Klaus-Dieter Maubach.
Scholz and Habeck reiterated that the government is putting together a third package to help households and companies. That would be in addition to measures already agreed worth around 30 billion euros.
"Some firms are also feeling the effects of the energy crisis enormously, especially small and medium-sized companies," Habeck said. "That is why we will extend the aid programs and, if necessary, recalibrate them to suit the situation."
Michael Holstein, chief economist at DZ Bank in Frankfurt, said the reduced VAT rate for gas consumers was similar to a temporary rebate on fuel tax introduced this year which ultimately brought only limited relief.
"It would have been better to help low-income households with a more targeted and direct measure," Holstein said by email. "That's what a social market economy is there for, especially in times of crisis."
(Updates with economist comment starting in second paragraph)
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