How value added tax (VAT) rates are levied on various goods and services has wide-ranging implications, including for the fiscal revenues of national and EU budgets and the prices consumers have to pay. This briefing examines how EU legislation shapes Member States' ability to set VAT rates. EU law establishes the framework within which Member States may apply different VAT rates, including the types of goods and services that can benefit from preferential rates. Such differentiation is used to pursue policy objectives – for example, supporting low-income households or incentivising the consumption of certain 'merit' goods. However, these policy choices can also create legal and administrative complexity and lead to sizeable revenue losses. Moreover, studies have questioned the extent to which lower VAT rates are effectively passed on to consumers by businesses, raising doubts about their efficiency as policy instruments. The European Parliament has expressed concerns about the legal uncertainty and the complexity arising from the proliferation of different VAT rates, and has called for regular reviews to assess which of the preferential VAT rates remain necessary and effective. At a time when many EU Member States face high budget deficits and competing spending priorities, a smart approach to VAT rate-setting is essential. Ensuring that VAT rate policy effectively balances social objectives, market efficiency and revenue collection is key to maintaining both fiscal sustainability and fairness within the EU. Source : © European Union, 2026 - EP Read more