Chain stores to absorb VAT hike rather than pass it on to customers

Spanish families and businesses on Saturday braced themselves for the impact of a hike in the value-added tax (VAT) rate at a time when the country has already slipped back into recession for the second time in three years.

As of September 1, the standard rate moves from 18 percent to 21 percent and the reduced rate from 8 percent to 10 percent. The super-reduced rate for essential goods such as milk, bread, eggs, vegetables, fruit and medicines remains at 4 percent.

However, some products and services have been moved from the reduced category to the standard one, meaning a 13-percentage-point hike in the tax rate will be applied. This will hit, for example, hairdressing salons, florists and funeral services, making even the cost of dying more expensive.

A number of chain stores have said they plan to absorb the increase rather than pass it on to their customers at a time when consumer spending has already been badly hit by the economic crisis, with a quarter of the working population out of a job.

Some small retailers have also indicated they won’t be putting up their prices, but will have to make adjustments elsewhere in order to do so.

Supermarket chain Mercadona, Spain’s largest retail distributor by sales, has denied it has already put up prices to compensate for the VAT hike, which it says it will absorb. Global fashion retailers Inditex, H&M and Mango have also decided to maintain current prices. Furniture giant IKEA will maintain the prices of about 65 percent of its products. Department store chain El Corte Inglés has yet to reveal how it plans to play the tax hike.

Consumer protection organizations claim the decision of retailers to maintain prices is a marketing ploy and that the VAT hike will eventually be passed on to customers. The CEACCU consumer organization estimates the VAT hike will add 600 euros a year to the cost of maintaining a household, while the Consumers and Users Organization (OCU) calculates that a family with four members will have to spend 470 euros more a year.

Households will also be hit by a double whammy as the VAT hike takes effect before the new school year starts. Many rushed out before Saturday to stock up. The OCU estimates the VAT increase will add 640 euros to the cost of each child per year in the shape of higher prices for transportation and school dinners.

The tax hike for the hostelry sector was raised from 8 percent to 10 percent, although a number of bar and restaurant owners already suffering from weak demand because of the crisis will not pass on the increase. “There are restaurant owners who have been suffering from the crisis for years, and it will be difficult for them not to transfer the increase to their customers,” says Emilio Gallego, the secretary general of the Spanish Hostelry Federation. “However, others will be able to adjust what they offer and absorb the hike.”

The hotel trade is also gearing itself for the impact of the hike. “We are in the grip of a collective psychosis because there doesn’t seem to be any bottom to the thing,” says Antonio Catalán, the chairman of AC Hotels by Marriott. “We are in the most complicated moment to introduce a hike, which is always the easy solution for the politicians, but a disaster.”

Tourism, a key sector for the Spanish economy, is quaking at the possible fallout from the hike. Travel agencies will have to absorb the increase for package holidays that have already been booked. “You can’t penalize the main industry in the country,” the chairman of the Spanish Confederation of Travel Agencies, Rafael Gallego, complains.