Czech leader sees third sales tax rate next year

PRAGUE, April 16 Wed Apr 16, 2014 10:43am EDT

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PRAGUE, April 16 (Reuters) - The Czech government may cut sales tax on medicine to 10 percent next year, but government spending plans are likely to rule out changes in other tax rates, Prime Minister Bohuslav Sobotka said on Wednesday.

The three-party ruling coalition, led by Sobotka's Social Democrats, agreed when it came to power earlier this year to create a third value-added tax rate, to make medicines and books cheaper, some time in the future. Medicines and books are now taxed at the lowest rate, 15 percent.

The Finance Ministry has put together a draft EU-convergence report that envisages a third VAT rate from 2015 and cuts the current 15 and 21 percent rates one percentage point from 2016.

Sobotka said on Wednesday a third VAT rate is possible next year, but lowering the top two rates would be difficult, because the government plans raise pensions and increase infrastructure investments next year.

"In the context of those priorities, I see the 10 percent VAT rate for drugs as a decent and reasonable compromise. It is an acceptable compromise for the Social Democrats," Sobotka said after a weekly cabinet meeting.

The government has pledged to keep its budget deficit below the EU limit, 3 percent of economic output, but it has backed away from the deficit-cutting plans of the previous government, to help an economy still recovering from recession.

The plan for a third, lower sales tax rate was agreed in the government programme, but the cut in current rates was only included in the Finance Ministry's convergence programme, a document analysing the economic outlook that is sent to the European Union's executive.

"Any change in other rates (besides a lower VAT on drugs) is not part of the coalition programme, it is not agreed in the coalition and it would have a budget impact that the Czech Republic can hardly afford in the nearest term," Sobotka said.

The Finance Ministry calculated lowering both VAT rates would cost 16.3 billion crowns ($820.40 million)in 2016. ($1 = 19.8684 Czech Crowns) (Reporting by Robert Muller; Editing by Jason Hovet, Larry King)

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