No income tax or VAT hikes next year in Iceland

The Icelandic government has announced that it will not introduce further increases to sales tax or income tax in its national budget for next year.

One of the ways to increase treasury takings which came under discussion earlier this year was to institute a single, flat rate of value added sales tax (VAT) on all goods and services. A parliamentary committee looked closely into the idea, reports.

VAT on food went down from 24.5 percent to seven percent on 1st March 2007; but the proposal would have seen it go up again so that food would be taxed the same as all other consumer goods. Under the current system, there are several different levels of VAT on different goods and services. Clothes, electronics and cars (among many other things) incur 25.5 percent tax. Increased food VAT is no longer on the cards, it was announced yesterday by Prime Minister Johanna Sigurdardottir and Minister of Finance Steingrimur J. Sigfusson. The current system will remain in place next year.

It was the IMF which recommended the changes to the Icelandic VAT system. It recommended two different stages, Sigfusson said: “To reduce the large gap between the highest and the lowest rates, which is especially big in Iceland. And then to change over to one rate.” He added that there are a lot of conflicting opinions on the idea of a flat rate and that any such move would need to be accompanied by compensation measures elsewhere to help those who lose out in the change; such as low-income households. He said the government has looked closely at the idea and does not consider it the right thing to do at this time.

When asked, Sigfusson also said the government does not plan to make any changes to the income tax regime next year. “There will be no increases in normal income tax brackets and changes are not expected to the income tax system,” the FinMin said.