Paris: French President Nicolas Sarkozy's plans to cut companies' social welfare charges suffered a hitch on Monday with a parliamentary panel rejecting the reform aimed at restoring French firms' flagging international competitiveness.

Facing an uphill battle for re-election in an April/May election, Sarkozy wants to push the reform through ahead of the vote, counting on it to help restore his economic credentials, dented by soaring unemployment and a record trade deficit.

However, the reform is unpopular with voters as the cut in companies' welfare contributions would be financed by raising the VAT sales tax to 21.2 percent from 19.6 percent currently.

The lower house of parliament's finance commission rejected an update of the 2012 budget including the reform. Reuters

The lower house of parliament's finance commission rejected an update of the 2012 budget including the reform because opposition lawmakers managed to muster a majority with many conservative deputies from Sarkozy's UMP party absent.

The reform can still win backing when the full National Assembly - where the conservative UMP holds a majority - votes on the budget update on February 21 before it heads to the Senate.

While the measure could be rejected by the Senate - where opposition Left-wing parties have a majority - the National Assembly could then overturn it and approve the reform in a final vote.

Finance Minister Francois Baroin downplayed the commission's rejection, saying at the Assembly: "It's much ado about nothing. It won't change anything in the final vote."

Socialist presidential candidate Francois Hollande, who leads Sarkozy in the polls by a comfortable margin, says that the sales tax hike unfairly increases the burden on all taxpayers and has promised to repeal it he wins the election.

Reuters