There would be no VAT increase on water and electricity bills in the Budget for 2012, Finance Minister Tonio Fenech said.

Consumers pay a reduced VAT rate of five per cent on utility bills and gas but the European Commission is suggesting increasing the rate.

“Without doubt, we are not considering increasing VAT on utilities in this Budget,” Mr Fenech said yesterday.

In a report published on Tuesday, the European Commission suggested strategic changes to some aspects of Malta’s taxation policy, including a controversial proposal to raise VAT on electricity and gas.

The report, Tax Reforms In The EU In 2011, says support to vulnerable households could be provided more efficiently through targeted welfare payments but questions the policy adopted by Malta and a few member states to “subsidise” energy through reduced VAT rates.

“In the current economic climate, it is important to utilise the taxation framework as efficiently as possible in environmental policy,” the report states.

It suggests phasing out environmentally-harmful tax subsidies with specific reference to Malta, Greece, France, Ireland, Italy, Luxembourg and Portugal.

Water and electricity tariffs have remained unchanged since 2010 when they were increased substantially to reflect higher international oil prices.