GovernmENT CHANGES TO TAX ON FUEL AND ELECTRICITY

The government will approve a series of tax cuts affecting fuel, electricity, and gas this Friday in an extraordinary Council of Ministers meeting covened to assess the initial response to the effects of the war in the Middle East. Among the most notable measures is the reduction of the VAT on fuels, which will drop from 21% to 10%, as reported this Friday morning by Cadena SER. This measure is complemented by others such as a reduction in the special tax on hydrocarbons and a reduction in the VAT on electricity and gas, according to sources familiar with the measures the government will propose. With these measures, the government aims to lower the price of gasoline and diesel at a time of significant tension in energy markets.

Energy products subject to the hydrocarbon tax have a highly varied chemical composition and are available in both liquid and gaseous states. Generally, they are those intended for use as heating fuel or other fuels, with the exception of coal and other solid hydrocarbons. These include gasoline, kerosene, diesel, fuel oil, liquefied petroleum gases, natural gas, biofuels, and biofuels.

The package also includes, according to the same sources, tax measures affecting energy . The VAT on electricity and gas will be reduced from 21% to 10%, in addition to a reduction in the special tax on electricity. Furthermore, the government will suspend the tax on the value of electricity production, a measure aimed at reducing system costs and preventing them from being passed on to consumers in their final bills.

The electricity tax is a levy that charges 5% on electricity consumption. It applies both to electricity supplied for consumption and to electricity consumed by producers themselves. It is an indirect tax included in the price and paid by the end consumer through their electricity bill, although the electricity companies are the ones who collect it from the tax authorities.

The tax on the value of electricity production, on the other hand, is a direct environmental tax levied on the production of electricity and its integration into the electrical grid. It is paid by energy producers (not consumers) and is calculated on the total amount they receive for generating that electricity, applying a tax rate of 7%.

With this set of measures, the government aims to contain the impact of the energy crisis stemming from the international conflict and curb a potential rise in inflation, protecting both households and businesses in a context of growing uncertainty. The illegal attack by the United States and Israel on Iran has caused gasoline prices to reach an average of €1.709 per liter at Spanish pumps in just three weeks, while diesel is now selling for €1.837, according to the EU Oil Bulletin published this Thursday, which uses average prices from Monday.

In addition to the tax package, the government will present “structural” changes affecting the energy sector. And, according to sources involved in the negotiations within the government, it appears that measures related to intervention in the rental market, demanded by both Sumar and the left-wing coalition partners, have been ruled out.

Prime Minister Pedro Sánchez will appear before Parliament after the cabinet meeting to present a package that appears to be less ambitious than the one implemented during the initial stages of the war in Ukraine. There are two reasons why, at least for now, the response is more restrained than it was in 2022. Firstly, the macroeconomic impact of the conflict is less than it was then, and the Socialist Party (PSOE), responsible for economic policy, is opting for proportionate and targeted measures that do not exceed Spain's fiscal capacity. Secondly, according to government sources, the coalition's parliamentary weakness and recent setbacks in Congress are forcing the government to present a minimal and less ambitious plan in order to garner the maximum possible support in Parliament.

Source :- El Pais