The plan, which the government announced cancellation of Thursday, would have raised VAT from 22% to 25%. The measure was intended to fill gaps in Italy's budget that left the country at risk of breaching the euro currency area's limits on deficits. Along with abandoning the VAT increase, the country will suspend a tax on plastics and sugar until January, the announcement said.
The VAT increase, which had been delayed several times before, was meant to ensure Italy remained within the euro currency budget deficit rule of 3% of gross domestic product. Subsequently, the fiscal rules have been relaxed amid the economic fallout of COVID-19, the respiratory disease caused by the virus.
The government's actions likely will come as a relief to businesses, one practitioner said, but he added that it could strain countries' budgets in the second half of the year.
"Quashing the VAT rise provides businesses with some planning headroom" to deal with the crisis, Richard Asquith, head of indirect tax at Avalara, told Law360. However, it may be premature "given the need that all countries will face in the second half of 2020 to start consolidating their financial positions as the COVID-19 lockdown eases."
Once economies start to stabilize and financial markets begin to demand new budget plans, "VAT is going to be the prime candidate for increasing," Asquith said.
Italy was the first European country to experience a severe outbreak of the virus and is just emerging from a severe lockdown that has been in place in some regions of the country since late February.
The country was at one point the epicenter of the pandemic in Europe and then the world, grim distinctions it has since passed to the United Kingdom and the United States. Italy's economy is set to contract by 9.5% this year, according to figures released by the European Union in early May.
The country has been at the forefront of calls to issue so-called coronabonds — whereby all countries that use the euro currency would issue debt together so as to borrow at a lower rate — to help countries in the European south deal with the economic fallout from the virus.
The Italian finance ministry could not be reached for additional comment.
--Editing by Vincent Sherry.
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