Greece woke up on Monday to a new life under austerity and reforms: Not only were the country’s banks reopened and Athens had started paying back its debts, according to some reports, but businesses owners had to deal with a big hike in sales tax. And experts are worried over the effect the hikes will have on consumer demand and wider economic growth.
The sales tax that Greeks have to pay on a range of goods and services- from every products to taxis and restaurants, rose on Monday from 13 percent to 23 percent as the Greek government implements reforms in return for a third bailout package.
It is estimated that the new hikes will cost Greeks 1,500 euros ($1,625) per year on average in an effort to generate 5 billion euros in revenue for the government, according to Greek newspaper Proto Thema.
The sharp rise in the sales tax on hundreds of products (including essentials like meat, sugar, sliced bread, coffee and canned foods) means that prices will automatically rise 9 percent, the paper said.
Tax changes ‘confusing’
The changes to Greek taxation follow the Greek government’s reluctant capitulation to lenders’ demands for reforms in return for a third bailout package worth 86 billion euros. The tax increases were a last-ditch bid by the government to show lenders that it was serious about reforms in return for aid to stave off bankruptcy and a potential exit from the euro zone.
Dorina Stathopoulou, manager of the Plaka Hotel in Athens, told CNBC that the tax hikes were necessary to increase government revenues, but nonetheless, the changes were confusing.
“The fact that they’ve raised taxes is to be expected but the problem is the way they’ve chosen to do the taxes, it’s confusing,” she said on Monday.
The 23 percent sales tax hike on hotels comes into effect on October 1 in a bid to avoid hitting this year’s tourism season. Greek islands which had enjoyed discounted VAT rates will also see tax rises in October. Tax increases on restaurants were not delayed, however, and came into effect on Monday. Stathopoulou said the different taxes on various products would make for confusion in restaurants.
“For example, spaghetti without meat will have a 13 percent tax rate but spaghetti with meat will be taxed at 23 percent, so it becomes complicated. How are we supposed to make a menu in these circumstances?” Stahopoulou said. “It’s like we are back in the second world war and meat is a luxury again.”