European film trade associations have reacted with "deep disappointment" to last week's European Commission (EC) ruling on value added tax (VAT), which keeps charges on DVDs and video cassettes at high levels.

The EC's internal markets commission said that the objective of its sixth VAT revision was to simplify and rationalise reduced VAT rates. But it did not accept that recorded music or video cassettes and DVDs should be put on the list of goods eligible for reduced rates.

That means that videos and DVDs, like music CDs, are subject to nationally-applied, full-rate VAT. This varies from 15% in Luxembourg to 17.5% in the UK and ranges as high as 25% in Denmark and Sweden.

The ruling also sustains the anomaly between recorded film, which carries full rate VAT, and cinema tickets, which attract only lower rate tax, as little as 5%. Other cultural goods currently allowed the lower rates include books, magazines, newspapers, theatres and concerts.

"By omitting DVDs, video cassettes and CDs' the proposal fails to recognise that DVD/video and music products constitute crucial vectors of European culture," said the VAT Video Coalition in a statement.

Coalition members include the European Film Companies Alliance, FIAPF, producers' associations Eurocinema and Eurocopya and the European Grouping of Societies of Authors and Composers (GESAC).

"The Commission clearly ignores that DVD/video is often the primary source of audiovisual content for many European consumers and that applying high VAT rates to these products penalises parts of the European population, especially young people, whose main access to cinema culture is often through video," added the VAT Video Coalition.

"The European video market is highly dynamic and brings an indispensable financial contribution to the European audiovisual and cinema sector," said Rasmus Ramstad, president of Svensk Filmindustri and chairman of EFCA. "The Commission missed an opportunity to demonstrate true commitment to promoting European culture and to create more opportunities for a wider range of European films to be offered to Europe's consumers."

Music industry representatives are similarly disappointed. "The proposal fails to recognise the cultural role of musical artists," said Michel Lambot, president of Independent Music Companies Association (IMPALA).

The trade representatives have promised to continue to fight the proposals up until the moment when the final decision is taken later this year at a meeting of national finance ministers. Many members of the European Parliament - which has no jurisdiction over taxation, but has often taken a stand on cultural matters - have also said they oppose the proposed directive.

Acknowledging that discrimination and distortions exist, Frits Bolkestein, internal market commissioner, said: "The current situation as regards rates is far from satisfactory. The VAT rates applicable in the Community remain highly disparate and very complex." But he argued that creating more exceptions does not level out the playing field. "It is true that books are privileged. That is a problem. But to answer that distortion of the market with another distortion would be wrong."

Bolkestein also countered film and music industry arguments about the usefulness of VAT cuts. He said that VAT was primarily a tax raising exercise by governments, not a stimulus package and that not all governments would implement the lower rates if allowed by the EU. That he argued could lead to greater distortion across Europe than currently exists. "The Commission considers that the main objective of VAT is to generate tax revenue: each Member State uses this revenue according to its own priorities. It should not be used to subsidise particular sectors."

Bolkestein said that according to a recent Commission study, the full benefits of rate cuts do not trickle down to consumers. "The Commission remains convinced that the reduction of VAT rates is not the best way of encouraging consumers to buy or use certain goods or services. VAT, unlike excise duty for example, is not designed to change consumer behaviour. Also, a reduction in VAT rates is never passed on in full in consumer prices: often it is negligible and temporary"

The music sector pleaded that with online piracy a growing threat to its business the EU could help by providing a means to reduce the price of discs. But Bolkestein said that VAT reductions could not solve the problem of piracy and could store up problems for the future. The music industry is trying to promote legal internet downloads, for which full-rate is currently payable. Reducing the rate on the physical product would create a differential with the internet version of the same content.