The reduction in VAT, a cornerstone policy of the German government’s coronavirus stimulus package, came into force on July 1. Here’s an overview of what’s happening, and how it benefits consumers in Germany. 

Why is VAT being reduced in Germany?

In an effort to boost consumer spending and drive the recovery of the German economy in the aftermath of the coronavirus pandemic, the federal government has opted to slash VAT rates. The move is designed to help people across the board, from everyday consumers and entrepreneurs to international companies across all sectors. 

VAT (Value Added Tax, officially called Umsatzsteuer but most often referred to as Mehrwertsteuer (MwSt) in German), is a tax that companies must add to their prices and then transfer to the tax office on a monthly, quarterly or annual basis.

When will the VAT rate be reduced and for how long? 

VAT will be reduced in Germany for a fixed six-month period: from July 1, 2020 to December 31, 2020. The standard VAT rate will drop from 19 to 16 percent, while the reduced rate (which is levied on some foods and other everyday consumer items) will be reduced from 7 to 5 percent. 

The fixed term is designed to create immediate incentive for consumers to “get out and buy things” in the second half of 2020 - especially big-ticket items like cars and white goods, where the greatest savings are to be had. According to Federal Finance Minister Olaf Scholz, “The aim is for German citizens to make a potential buying decision now and not put it off until next year or the year after.”

Will all goods and services automatically become cheaper?

In theory, the idea is for traders and service providers to pass the VAT saving directly onto their customers so that goods and services become cheaper. However, they are in no way legally obligated to do so.

Some big players have announced that the lower VAT rate will be passed on, including most of Germany’s major supermarkets and the railway company Deutsche Bahn. 

There were some concerns that retailers would be forced to temporarily change their price labels to reflect the change, but the government is adamant that the VAT reduction should be passed on to customers with as little red tape as possible. Therefore, it is likely that most retailers will apply the discount at the till.

How much will consumers in Germany actually save?

While your average weekly shop is unlikely to be noticeably cheaper - we’re talking savings of a few cents at most - the VAT reduction will make a substantial difference to the price of larger purchases. 

For example, German news site Merkur took a look at the VAT reduction plans to give an idea of the kinds of savings that could be made on various popular consumer items in Germany. Here’s what they found:

In relation to individual products, therefore, the savings don't seem so great. However, if you take a look at longer-term figures for expenditure on consumer goods in Germany, a slightly different picture emerges.

The average household in Germany spends approximately 20.420 euros per year on private consumer goods, which with the VAT reduction would equate to a saving of at least 43 euros per month - hardly something to be sneered at.