VAT would mean higher electric, water, and rent bills for many in Costa Rica

September 1^st, 2015 (ICR News) A controversial new Value-Added Tax (VAT) being pushed by the Solis administration would mean higher electric, water, and rental payments for many in Costa Rica, should the reform package be approved.

The VAT would be 14 percent during its first year, increasing to 15 percent by the second year of its implementation, and would apply to nearly every good or service sold in the country.

However, the Ministry of Finance has proposed exemptions to a handful of goods and services, including electricity, water, and rent, which the ministry says would exempt the majority of Costa Ricans from paying VAT on their basic housing needs.

Still, the VAT would hit home for many residents.

In the case of potable water, an exemption to the tax would be made for households that consume 30 cubic meters or less, which the ministry said is 78 percent of households.  That leaves 22 percent of households that would ultimately see their water bills increase by 15 percent.

For electricity, the ministry proposes an exemption for households that use less than 250 Kwh, which the ministry said is 71 percent of households.  That leaves 29 percent of households that would ultimately see their electric bills increase by 15 percent.

Meanwhile, landlords who lease their properties for more than ¢403,400 (about US $764) per month would be required to collect VAT from their tenants, while tenants paying less than this amount would be exempt from the tax.  According to the ministry, some 40 percent of tenants would be required to pay the tax while 60 percent would be exempt.

Concerns and opposition to reform package

The Solis administration is pushing a far-reaching tax reform package in an attempt to tackle the government’s soaring fiscal deficit.

In addition to the VAT, other reforms included in the plan include doubling the transfer tax on real estate from 1.5% to 3%, doubling the transfer tax on motor vehicles from 2.5% to 5%, big increases in the income tax (for those required to pay it), and a 15% tax on all forms of capital gains.

The reforms have faced strong opposition in the Legislative Assembly, with lawmakers from seven out of nine political parties opposing the reforms as of early August, though reports would suggest that the opposition is weakening.

Opposition lawmakers have repeatedly called on the administration to make significant cuts to public spending – including “mega salaries” paid to public servants – before asking the country’s citizens for more tax revenue.