Today, the Saeima rejected the amendments to the Value Added Tax (VAT) Law developed by opposition deputies, which envisage reducing the VAT rate on bread, milk and sour milk products without additives, fresh meat and eggs.
The Group of the Greens / European Free Alliance, as well as non-attached Members, call for such changes to be introduced from 1 January 2021.
The aim of the bill is to eradicate the shadow economy and create a level playing field for local food producers in order to increase the demand for their products, while reducing the tax burden on the most vulnerable by purchasing basic necessities for daily consumption.
According to the Council of Europe Directive of 28 November 2006 on the common system of VAT, a country may have two reduced VAT rates, which may not be less than 5%. The reduced VAT rates are set by the Member State for supplies of goods and services that fall into the categories set out in the VAT Directive. The VAT Directive also stipulates that a Member State may set a reduced rate of VAT on food for human and animal consumption.
MEPs explained that most EU Member States apply reduced VAT rates to food, mainly VAT to bread, cereals, milk, dairy products, vegetables, fruit and meat. In some cases (Spain, Italy, Portugal, Poland), VAT rates are particularly reduced for unprocessed or semi-processed products.
VAT differentiation reduces inequality, politicians believe, adding that currently Latvia has one of the highest income inequalities in the EU.
The deputies believe that the introduction of the reduced VAT rate will provide support to Latvian local producers of dairy, sour milk products, eggs, bread and meat. Buyers will prefer fresh food products produced in Latvia, with a significant reduction in the final price.
The negative budgetary impact is expected to be offset both by a small increase in consumption and the resulting positive fiscal consequences, as well as by a significant decline in the share of the informal economy in the sector, with a negative impact on legally operating companies.
Taking into account the successful experience with the introduction of a reduced VAT rate of 5% for fruit and vegetables typical of Latvia, both agricultural producers and traders of these products have welcomed the introduction of a reduced VAT rate for Latvia.
A reduction of VAT to 5% would have the greatest effect on fresh products with a short shelf life, therefore the list of annexes to the bill also includes products without additives, including sugar, as well as drinking milk with a shelf life of up to 10 days, chilled and fresh, but not frozen meat, bread without additives, and eggs in shell.
Further calculations of the possible temporary negative impact of the reduced 5% VAT rate on the national budget should take into account that a reduction in VAT for a certain category of goods should not lead to a sharp reduction in the amount of VAT due, as the savings from the final price the population will mainly spend on other goods at a rate of 21%.
Practice has also shown that, as a result of the implementation of reduced VAT on fruit and vegetables, the initial reduction in the share of the shadow economy included in the calculations was calculated to be much smaller than it turned out to be. This means that the increase in the labor tax contribution due to the departure of some producers from the gray area should be taken into account when calculating the potential initial negative fiscal effect from lost tax revenues.