Sharp cut planned in VAT for small businesses to reduce prices and create jobs
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The Finnish government is planning a sharp cut in value-added tax for certain small businesses in the service sector in order to reduce prices and create jobs. The tax rate would be reduced from the present 22 percent to eight percent.
This means that VAT paid by barbers, hair salons, and shoe repair services would drop to one third of the present level.
The move would also apply to clothing repair services and bicycle repair shops.
The proposed cut in VAT would come into effect at the beginning of next year.
The European Union agreed last week that member states should be allowed to levy lower VAT in certain sectors.
The lowest VAT rate in the EU is currently 15 percent. In Finland, VAT in the service sector is 22 percent.
Under the EU rules, member states can choose two fields from a list of types of small businesses, including barber and hair styling services, small repair shops, home repair and cleaning services, and in businesses offering home care services, for a VAT discount.
Petteri Rauhio of the Ministry of Finance says that Finland would probably pick hair styling and repair shops, because refurbishment work, and cleaning and home care are already eligible for income tax breaks.
Finnish barbers and hair stylists are welcoming the prospect of lower VAT. The high tax rate has forced many barbers and stylists to become private entrepreneurs in the labour-intensive field.
"If the tax cut is so great, then certainly, it will have some effect on prices. It will have a very strong effect at least on employment", says Arja Laurila, executive director of the Finnish Hair Entrepreneurs’ Association.
There are nearly 12,000 entrepreneurs in the hair styling business in Finland, who either own a salon or rent a chair in one of them. In addition, there are about 3,000 wage-earning hair stylists.
Lower VAT would make it more feasible for barbers and stylists in business for themselves with a rented chair in a salon to become paid employees of the establishment.
Laurila also says that lower VAT would alleviate the problem of undocumented labour in the business. The association calculates that about 20 percent of people working in hair styling do not pay taxes.
Laurila feels that a lower tax rate would mean that the risk of being caught would not be worth it.
The Association of Shoe Repair Services also calculates that lower VAT would increase the number of jobs in the business. There are currently less than 300 professional cobblers in Finland.
"Many entrepreneurs work for up to 13 hours a day, especially in large shopping complexes. Many have said that they would hire someone immediately, if the costs went down", says the association’s chairman Pertti Lönnqvist.
The state collected over EUR 14 billion in tax revenue from VAT in 2004. The Finance Ministry has calculated that the proposed tax cuts for hair stylists and repair shops would deprive the state of about EUR 40 million a year.
The experimental programme would start at the beginning of 2007 and end by 2010.
"After that, we will see if prices have gone down, and if there are more jobs. The continuity depends completely on how the goals have been realised", Rauhio says.
Helsingin Sanomat
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| 9.2.2006 - TODAY |
 Sharp cut planned in VAT for small businesses to reduce prices and create jobs
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