Minister for Tourism Leo Varadkar has announced that the temporary 9% VAT rate for the tourism sector will stay until the end of 2013.
The rate applies to a range of services in the tourism sector, including hotels, restaurants, leisure centres, and attractions.
But restaurants, hotels and other businesses had been expressing concern the cut would end this year.
Mr Varadkar said: "Following recent discussions with the Minister for Finance, I have obtained an assurance that the lower rate of VAT will be maintained during 2013 so that businesses, tour operators and customers alike can plan for the 2013 season knowing that the 9% rate will apply. Initial indications suggest that the policy has worked well and there has been an increase in employment in the sector with prices charged to consumers falling as well.
It was reduced to 9% last year for certain tourism and leisure businesses as part of the jobs initiative.
"Early indications are that the policy is working. Employment among accommodation and food providers has increased by around 6,300 since July 1, last year. "
"I was pleased to see that overseas visitor numbers increased by 6% in 2011. While there has been a marginal reduction in overseas visits in the first three months of 2012, indications from industry representative groups are positive with inquiries and advance bookings for the coming months ahead of those at the same time last year."
The Restaurants Association of Ireland (RAI) welcomed the decision saying it will allow the sector to grow.
The RAI said: "70% of restaurants have said the reduction of the VAT rate in 2011 has helped business with 30% directly attributing the VAT reduction to hiring new staff."
Welcoming the news, Niall Gibbons, Tourism Ireland chief executive, said: "In recent years, perceptions of the value available here, among overseas consumers, have improved; and we know that a recent survey by Hotels.com showed that Dublin hotels are now the least expensive in Europe."