The Czech Republic has made significant progress in collecting value added tax (VAT) in recent years, despite the many challenges facing the economy. Developments in tax revenue and compliance point to the increasing efficiency of VAT collection, but also to the impact of macroeconomic factors such as inflation, the energy crisis and the post-pandemic recovery.

VAT is a fundamental pillar of the tax system in the Czech Republic. It accounts for more than 40% of total tax collection in the Czech economy. The importance of this tax has increased over time. In 1995, VAT accounted for only 28% of total collections, today it accounts for over 40%.

VAT revenue in the Czech Republic will grow by 15.6% in 2022, reflecting strong nominal GDP growth of 11.8%. This growth was primarily driven by high inflation and the ongoing economic recovery from the COVID-19 pandemic. Real GDP grew by 4.0% in 2021 and 2.8% in 2022, with domestic demand being the main driver of growth. However, household consumption stagnated in 2022 due to high inflation, which reached a record high of 18.0%, well above the EU average of 11.5%.

In 2023, VAT collection increased by 5.8%, helped mainly by nominal GDP growth of 8.1%. Last year, VAT collection increased by 3.0%, but the rate changes have to be taken into account, as the two reduced VAT rates of 10% and 15% were replaced by one reduced VAT rate of 12%.

One of the key indicators of the efficiency of VAT collection is the VAT compliance gap, i.e. the difference between theoretically expected and actually collected VAT revenue. In the Czech Republic, this gap has decreased significantly. In 2010, almost 23% of the potential collection of this tax was not collected.

Two measures introduced in 2016, control reporting and electronic sales registration, brought about a significant change. Since then, the efficiency of VAT collection has increased significantly. In 2022, the VAT tax gap has decreased to 4.2%, and estimates for 2023 even show the tax gap falling below 4%.