Government adopts decision to increase higher rate of VAT from 17% to 19%

Podgorica, Montenegro (28 May 2013) – Government of Montenegro adopted a decision to increase the higher rate of VAT from 17% to 19% and to keep the VAT reduced and zero rates at the same levels, the Ministry of Finance stated in its press release.

By adopting such a decision, according to the press release, the Government continues its efforts to stop further deterioration of the fiscal stability, primarily the indicators of public debt, which is the result of a fall into several years of budget deficit, that is, the imbalance between public revenues and expenditures.

In case of further deepening the gap, the budgetary liquidity might be endangered, which would slow down the servicing of the state’s obligations and negatively affect  the citizens and the real sector. This confirms the necessity of reaching such a difficult and unpopular decision, which will, along with other measures of fiscal adjustment, contribute to decrease the need to take out loans, therefore cutting public debt and advancing stability of Montenegro's fiscal, financial and macroeconomic system, the Finance Ministry emphasises.

A previous analysis showed that the selective increase in the VAT rate will generate one-time price rise, which will be mitigated by maintaining lower VAT rate of 7% at the same level.

By maintaining the lower VAT rate, the impact on the prices and the standard of living will be minor, as products and services that are taxed at the lower rate account for about 50% of consumer basket. Therefore, the most vulnerable social categories of the population will be protected, as well as the part of the demand that is absolutely inelastic with respect to price movements.

Through this selective approach, the competitiveness of the economy will be partly protected, in particular the sector of tourism, as services of accommodation and food products which dominantly create prices in the area of tourism services, will continue to be taxed at the lower, i.e., the same VAT rate, the Finance Ministry’s press release concludes.