WHY VAT ON ELECTRICITY SHOULD REMAIN AT 5% - SOCIAL JUSTICE, GROWTH DRIVER AND QUANTITATIVE DOCUMENTATION - Filenews 2/10
By Christakis Hatzilaou
The reduction of the Value Added Tax (VAT) on electricity to 5% for household consumers, from May 1, 2026 to March 31, 2027, is an essential measure to relieve households. The measure is included in the official government support package.
The crucial question, however, is not only what will apply until March 2027. It's what happens next.
The restoration of VAT to 19%, if the price before VAT remains at the current high levels, will not constitute a neutral fiscal adjustment. It will be additional taxation on an already high cost, which was also shaped by the long-term delays and failures in the country's energy infrastructure.
The European Union does not impose 19%
Directive (EU) 2022/542 includes the supply of electricity in the categories of goods and services to which Member States may apply a reduced VAT rate. According to the European framework, the minimum allowed reduced rate is 5%. The maintenance of reduced VAT on electricity is therefore fully compatible with European law. The implementation of the 19% is a national fiscal and political choice, not a European obligation.
Several Member States, such as Malta (5%) and Belgium (6%), are already making use of the possibility of applying reduced VAT to electricity. The specific regulations differ from country to country, depending on the national tax framework and the European procedures provided. The essential thing for Cyprus is that the European Union does not impose a 19% rate on electricity.
Keeping VAT at 5% is therefore an available national fiscal and policy option. Cyprus has the ability and obligation to protect consumers as long as the price of electricity remains too high.
Electricity as a social good
When the state taxes electricity at 19%, it imposes a horizontal tax that affects households and the middle class. At the same time, it increases the operating costs of businesses, crafts and trade. The increased energy costs are passed on to the final prices of products and services and burden the economy.
If the state is looking for revenue, it could claim it from the over-taxation of luxury goods or the fight against tax evasion, and not turn a survival good into a tax collection mechanism.
The cost of delays
Cyprus is still heavily dependent on liquid fuel electricity generation, while the import of natural gas for electricity generation has not yet been completed.
The causal chain is clear: A delay in the import of natural gas → the continued use of more expensive and more polluting fuels → increased fuel costs and emission allowances → a higher price of electricity → a higher burden of VAT.
The consumer did not choose the fuel, did not set the project schedules and is not responsible for the delays. It is not right to be asked to pay 19% VAT on a price that remains inflated by pending energy issues and structural weaknesses. International factors (fuel prices and emission allowances) affect the price, but do not negate the responsibility of the state to limit domestic cost sources first.
By Christakis Hatzilaou
The reduction of the Value Added Tax (VAT) on electricity to 5% for household consumers, from May 1, 2026 to March 31, 2027, is an essential measure to relieve households. The measure is included in the official government support package.
The crucial question, however, is not only what will apply until March 2027. It's what happens next.
The restoration of VAT to 19%, if the price before VAT remains at the current high levels, will not constitute a neutral fiscal adjustment. It will be additional taxation on an already high cost, which was also shaped by the long-term delays and failures in the country's energy infrastructure.
The European Union does not impose 19%
Directive (EU) 2022/542 includes the supply of electricity in the categories of goods and services to which Member States may apply a reduced VAT rate. According to the European framework, the minimum allowed reduced rate is 5%. The maintenance of reduced VAT on electricity is therefore fully compatible with European law. The implementation of the 19% is a national fiscal and political choice, not a European obligation.
Several Member States, such as Malta (5%) and Belgium (6%), are already making use of the possibility of applying reduced VAT to electricity. The specific regulations differ from country to country, depending on the national tax framework and the European procedures provided. The essential thing for Cyprus is that the European Union does not impose a 19% rate on electricity.
Keeping VAT at 5% is therefore an available national fiscal and policy option. Cyprus has the ability and obligation to protect consumers as long as the price of electricity remains too high.
Electricity as a social good
When the state taxes electricity at 19%, it imposes a horizontal tax that affects households and the middle class. At the same time, it increases the operating costs of businesses, crafts and trade. The increased energy costs are passed on to the final prices of products and services and burden the economy.
If the state is looking for revenue, it could claim it from the over-taxation of luxury goods or the fight against tax evasion, and not turn a survival good into a tax collection mechanism.
The cost of delays
Cyprus is still heavily dependent on liquid fuel electricity generation, while the import of natural gas for electricity generation has not yet been completed.
The causal chain is clear: A delay in the import of natural gas → the continued use of more expensive and more polluting fuels → increased fuel costs and emission allowances → a higher price of electricity → a higher burden of VAT.
The consumer did not choose the fuel, did not set the project schedules and is not responsible for the delays. It is not right to be asked to pay 19% VAT on a price that remains inflated by pending energy issues and structural weaknesses. International factors (fuel prices and emission allowances) affect the price, but do not negate the responsibility of the state to limit domestic cost sources first.
Quantitative comparison and tax dividend
For the comparative evaluation of scenarios in relation to the reinstatement of the 19% VAT, a bimonthly EAC tariff (June – July 2026) for a household consumption of 1,000 kWh and an indicative scenario of natural gas utilization with efficient combined cycle units are used. In the case of the EAC tariff, which basically includes production costs, network costs and supply costs, the VAT calculation basis amounts to 27.6 cents/kWh, while in the case of the indicative scenario of natural gas it falls to 21.4 cents/kWh.
| Taxation Scenarios | Price before VAT | Contributor | VAT |
| Liquid fuels (current regime) | 27.6 cents/kWh | 5% | 1.38 cents/kWh |
| Liquid fuels (19% VAT reset) | 27.6 cents/kWh | 19% | 5.24 cents/kWh |
| Natural gas (indicative scenario) | 21.4 cents/kWh | 19% | 4.07 cents/kWh |
Conclusions:With the reinstatement of the 19% VAT, the consumer is burdened with 3.86 cents/kWh, i.e. 38.6 euros per invoice.
With the advent of natural gas, the consumer could pay 6.2 cents/kWh less.
With 19% VAT and liquid fuels, the state collects 1.17 cents/kWh more than in the indicative scenario of natural gas. This difference is a tax dividend of the high prices maintained by the delays in infrastructure.
Note: The cost of 21.4 cents/kWh before VAT is indicative of an unfavourable estimation scenario for natural gas and not a forecast. It is based on a final natural gas price of 65 €/MWh, a net efficiency of 50%, an emission allowance price of 75 €/tonne of CO₂ and other EAC tariff charges of 4.9 cents/kWh. The actual result will depend mainly on the final delivery price of the natural gas and the actual efficiency of the units.
Revenues from pollutants
The Republic of Cyprus receives tens of millions of euros annually from the auctioning of emission allowances (e.g. €95.5 million in 2024). According to European legislation, these revenues must be directed to actions for the green transition. The state must use them for energy storage systems and upgrading networks, in order to achieve a permanent reduction in the price of electricity, instead of passing on the cost of delays to consumers through higher VAT. Also, part of the revenues from pollutants could subsidize electricity bills in a targeted manner.
Conclusions
Keeping VAT at 5% is not a government favour, but a measure of social justice and a necessary compensation to consumers until there is measurable evidence of a possible reduction in the cost of electricity by:
the arrival and utilization of natural gas,
the installation of storage systems and the more efficient utilization of RES,
the operation of the electricity market that will transfer a real benefit to the consumer.
The consumer cannot pay the cost of energy delays (liquid fuels and pollutants) and an increased tax on it at the same time. The expiry date of a temporary measure is not an energy policy. The result on the electricity bill is what counts. First the state reduces the real cost of electricity and then reviews the tax – not the other way around.
the installation of storage systems and the more efficient utilization of RES,
the operation of the electricity market that will transfer a real benefit to the consumer.
The consumer cannot pay the cost of energy delays (liquid fuels and pollutants) and an increased tax on it at the same time. The expiry date of a temporary measure is not an energy policy. The result on the electricity bill is what counts. First the state reduces the real cost of electricity and then reviews the tax – not the other way around.
