VAT was introduced in Croatia on January 1, 1998, as a replacement for the multistage turnover tax. It was levied at a single rate of 22%, with a small number of standard exemptions and without any zero rates, except those on exports. But the argument that VAT of this kind was a relatively large burden on lower-income groups was used soon after to introduce zero rates on domestic transactions as well. First of all, 1 November 1999saw the introduction of the zero rate for bread, milk, books, medicines on the Croatian Institute for Medical Insurance List and some medical products. After this, in June 2000, the zero rate began to be applied to the taxation of scientific and scholarly journals, in September of the same year to the screening of films and in 2001 to package tours of foreign tourists.
In the EU accession process and the harmonisation of the Croatian VAT system with the Sixth Directive the existence of the VAT zero rate on domestic transactions will need to be revised. In a certain period, to be defined during the negotiations process, it is possible that the zero rate will have to be abandoned and replaced by a reduced rate, which, according to the Sixth Directive, cannot be lower than 5% and may be applied to goods and services defined in Annex H of the Sixth Directive.
The objective of this research was to analyse the effects that the abandonment of the zero rate and the move to a positive rate will have on certain economic parameters:
- central government budget revenues from VAT,
- consumer prices,
- household spending structure.