A report produced for the tourism and hospitality industry has warned that tens of thousands of jobs could be lost if the reduced 9% VAT rate is returned to 13.5% at the end of February as planned.
The research commissioned by the Irish Tourism Industry Confederation (ITIC) also claims that if the rate is restored, the extra cost will likely be passed on to consumers, adding 4.1% to bills.
The 13.5% rate was lowered to 9% in November 2020 to help stimulate activity in the tourism and hospitality sectors during the pandemic and has remained at that level since.
It was last extended in May of last year and is due to expire on February 28, at which point the reduction will have cost the exchequer €900m in lost tax revenue.
But the tourism and hospitality sector claim the reduced rate has led to the recovery of the sector, which employs 240,000 people and is worth a combined €12.5bn to the economy each year.
In a report commissioned by ITIC, economist Jim Power estimates that if the VAT rate returns to 13.5%, as many as 10% of the jobs in the sector, totalling 24,000, could be at risk.
This is because the extra cost would further undermine the competitiveness of the sector, which is already under significant pressure due to rising energy and other costs and labour shortages.
However, the report also acknowledges that it is difficult to be very precise about the business and employment impact because of the uncertainty going into 2023 and the lack of visibility.
"The bottom line is that the risk of a downturn in international travel caused by a marked deterioration in the global economy is very real and could have serious implications for Ireland's tourism industry," said Mr Power.
"The Vat increase at this time would threaten the viability of businesses still struggling to recover from the impact of Covid-19."
"Many more businesses could be forced to shut down and thousands of jobs could be lost."
The research also suggests that given the margin squeeze currently being experienced by affected businesses, the tax increase would have to be passed on rather than absorbed.
This would ultimately lead to accommodation and food service prices rising by around 4.1%, further damaging demand.
But the Irish Congress of Trade Unions (ICTU) has said it opposes the retention of the 9% rate as it was always a temporary measure and there is no logical case for it to remain.
ICTU said the sector received significant state resources during the pandemic without any evidence that it had been passed on to customers.
"Like all businesses, the hospitality sector received generous support from the taxpayer to get through the pandemic," said general secretary, Owen Reidy.
"However, we have seen various reports of price gouging from some hotels over the summer. It is excessive to argue that the industry will lose jobs if the rate is restored."
"On the contrary in the current tight labour market, the industry has difficulty attracting and retaining workers precisely because the industry is rife with low pay and precarious work."
"The government should not be taken in by this report commissioned by the tourism industry".
The Government has indicated several times that it will review the plan to increase the 9% rate closer to the time it is due to expire, in the context of the economic and exchequer situation at that time.
Just yesterday the new Minister for Enterprise, Simon Coveney, said it had been a very generous measure which was supposed to be temporary, to give a "shot in the arm" to the sector.
He said the opportunity cost of keeping it for longer would have to be considered, as well as whether supports could be more targeted.
He added that a decision would be made in the coming weeks.
In its report published last year, the Commission on Taxation and Welfare recommended that the rate be restored to the 13.5% level and that it should be increased progressively over time.
It said the Government should not use temporary VAT reductions to boost economic activity.
