Greece scraps reduced VAT rates on islands as per bailout deal

ATHENS (Reuters) - Greece will scrap reduced value added tax (VAT) rates on Oct. 1 on six islands which are very popular with tourists, as agreed with its international lenders, the finance ministry said on Monday.

Prime Minister Alexis Tsipras, who was re-elected on Sept. 20, has promised to streamline the VAT system as part of Greece's third bailout agreement.

Plans to increase VAT on Greek islands prompted fierce criticism from businesses and met with resistance by the junior coalition party, the Independent Greeks, over the summer.

But the newly re-elected government must implement the measure to successfully conclude its first bailout review and get more EU/IMF funds.

"It is clear that this development is a political necessity (and not a choice) which derives from the agreement with the institutions, and is a basic step to proceed with the review and the following steps," the finance ministry said in a statement.

From Thursday, the three VAT rates of 6, 13 and 23 percent will apply on Santorini, Mykonos, Rhodes, Naxos, Paros and Skiathos, as in the rest of the country, the ministry said.

More islands are expected to enter the new scheme in June 2016 and in 2017.

The ministry said that the VAT hikes will be reviewed in 2016, if Greece exceeds its revenue targets from tackling tax evasion and that the government will take measures to mitigate the impact of the increases on residents.

Tourism is the Greek economy's mainstay and revenues are expected to hit a record high this year.

(Reporting by Renee Maltezou; Editing by Louise Ireland)