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Five questions about how the FAI reduction due to VAT works

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OFuel prices have risen and the forecast is that the additions will continue early next week, which led the government to announce measures to try to mitigate the impact of these increases. One of them relates to the reduction of the Tax on Petroleum Products (ISP) based on VAT receipts.

How will this work? How will the weekly monitoring of quotations be done? What will be the impact? O Up-to-the-minute news prepared a series of five questions and answers on the subject.

1. How will the government upload the ISP?

The Prime Minister, António Costa, announced that the government would reduce, through the ISP, the increase in tax revenue that it obtains thanks to the VAT applied to fuels.

In other words, in practice, the Government has decided to create a compensation mechanism aimed at tax neutrality, reduce on the ISP side and by the same amount the additional revenue on the VAT side due to the increase in fuel prices.

As the Prime Minister clarified, the increase in VAT revenue “will be neutral from a tax point of view for taxpayers. Therefore, in the tax dimension, consumers should not suffer the impact of the increases” .

2. How will this monitoring be carried out?

The government will post friday an ordinance with the formula that the increase in VAT revenue resulting from the increase in fuel will be compensated by an equal reduction in the ISP. “We will publish the formula on Friday in an order, so people can track in real time and understand how returns are being achieved [via ISP]“said the Secretary of State to the Lusa agency.

The objective is to explain how the compensation between the two taxes is carried out and that consumers can check how it affects sales to the public.

3. How much is the ISP reduction on a 50 liter tank?

A diesel price increase equal to this week would make 50 liters cost eight euros more, but with the announced compensation from the ISP, the increase drops to 6.5 euros, down from 1.5 euros.

Simulations performed by Deloitte indicate that, in the case of straight gasoline, and facing a price increase scenario similar to this week, filling 50 liters would cost another five euros without the compensation mechanism and another 4.07 euros with the addition of VAT to pass on to the ISP.

4. From what value does this measure take effect?

The compensation of the increase in VAT receipts for an equal reduction in the ISP will only take effect if the price of fuels increases by more than five cents, according to calculations by BA&N research units. According to the simulations, to have a discount of one cent from the FAI, “it will be necessary to anticipate an increase of 5.4 cents per liter in the prices of simple diesel and simple 95 octane gasoline the following week”.

5. Will the measure be sufficient to mitigate the impact of the price increase?

The measure mitigates the impact of rising prices on consumers, but don’t eliminate it because, as the Prime Minister said at the beginning of the week, “as for the increase in the price formed internationally”, there is “no instrument at this time to act directly on it”.

Still according to the consultant BA&N, “the measure aims for tax neutrality and not price neutrality, so consumers will always pay more for fuel to be entitled to this discount from the ISP”.

The compensation measure decided by the Government takes into account the fact that, unlike VAT, the income of the FAI is a fixed amount and therefore “totally insensitive to the cost of diesel and gasoline”.

In addition, António Costa said: “Portugal, at the moment, cannot have changes in terms of VAT rates, because it does not have European authorization” – pointing out, however, that this authorization has already been requested by all Member States.

Added to this is the fact that the tax changes are an Act of Parliament, “which, as we know, is not possible at the moment, because the Assembly of the Republic is not fully functioning”.

Read also : New rise in sight: Fuels become more expensive on Monday

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