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If VAT on food is reduced, prices in stores will decrease 5.5% on average

 RIGA, Nov 8 - If value added tax on food products is reduced from 21 percent to 12 percent, prices in stores will decrease by 5.5 percent on the average, whereas retail sales volume will increase 3.1 percent, according to a study that Riga International School of Economics and Business Administration (RISEBA) and Latvia University of Agriculture carried out for the Agricultural Organizations Cooperation Council.
According to the study, if VAT on all food products is reduced, and no other taxes are raised to compensate for this, state budget revenue will fall by LVL 86.6 million in 2013. On the other hand, if VAT is reduced on various goods with shorter shelf lives, budget revenue will decrease LVL 38.7 million.
The study also concludes that reducing VAT on certain food product groups to 12 percent would have been much more efficient solution in order to reduce inflation, and it would affect budget revenue less than the reduction of VAT rate from 22 percent to 21 percent this past summer.
RISEBA Professor Vulfs Kozlinskis notes that VAT on food products affects needy residents much more than the wealthy residents. Taking into account that income inequality in Latvia and Lithuania is the highest in the European Union, applying full VAT rate to food products further increases such inequality.
University of Agriculture Faculty of Economics Dean Irina Pilvere informs that reduced VAT rates are applied to food products in 21 out of 27 EU member states. She believes that reducing VAT on food products would also contribute to curbing shadow economy.
The Finance Ministry previously said that if VAT on food products was reduced to 12 percent, state budget revenue would decrease by LVL 140 million annually.
At the moment, reduced VAT rates are applied to food products in most EU member states, while there is standard VAT rate on food products in six countries - Denmark, Romania, Latvia, Lithuania, Estonia and Bulgaria.
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