State snubs easing food tax load

Photo: Caro / Scanpix

Baltic States VAT rate remains much higher than in Nordic region.

By the way: the state has a supporter in the very first person addressed by Postimees reporter at Nõmme Marketplace yesterday. «20 per cent VAT on food is absolutely normal,» said Riina Rõbakovskaja. According to her, even though food is much more affordable with Finnish and Swedish wage levels, we still should not lower the VAT rate.

True, pensioners Ants Luts and Ants Joosep, killing time nearby, thought the contrary. VAT must be lowered. How much? That’s difficult to say...

Ministry of Finance and governing politicians alike are resisting lowering the food VAT rate. The current government’s policy being the diminishing of tax differences. The Reform Party/IRL coalition also aiming at taxing consumption, avoiding increases of income tax or taxation of property.

With food VAT lowered from 20 to 10, state revenues for 2014 would drop by some €140m.

A loss of the same magnitude would be faced by the state treasury should VAT rate for all products taken back to pre-crisis level. With an overall 18 per cent rate, €160m less would enter state coffers in 2014.

According to Andrus Säälik, fiscal policy department head at Ministry of Finance, VAT rate is inefficient in bringing down food prices.

«The food price drop would be smaller than expected, as part of it would be grabbed by producers, processors, traders and retailers,» commented Mr Säälik.

Mr Säälik also echoed words uttered by finance minister Jürgen Ligi, according to whom the rich would gain more by lowered food taxes than the poor. For some reason, Mr Säälik refrained from repeating Mr Ligi’s comment that people are too fat anyway and they would be stirred to eat even more by low VAT.

At the ministry’s estimation, tax fraud would increase with VAT incentives; collecting of taxes would become more expensive.

«The consumers’ gain from possible price cuts would be smaller than their losses from the state’s decreasing tax revenue, resulting in poorer state services. Economic theory promotes simple tax system, free from incentives, as then price signals and market shaped consumer and producer behaviour remains undistorted,» commented Mr Säälik.

Oleg Gross, owner of store chain OG Elektra, said that 20 per cent food VAT does indeed help the state budget, but is unfair.

Mr Gross said that staple goods – bread, white bread, eggs – ought certainly to have lower VAT, 14 per cent perhaps. According to him, VAT comes especially hard on poorer people, who would be greatly helped should it be lowered.

In Estonia, 20 per cent VAT has to be paid for all goods, with a few exceptions. The tax rate rose by 2 per cent in mid 2009 as the state was in need of emergency income.

Some comfort, it seems, may be drawn from Latvia and Lithuania having a VAT that is higher yet – 21 per cent. Like Estonians, the Southern neighbours raised their rates in 2009. True: in Latvia, it was even higher – 22 per cent – from the start of 2011 to the middle of 2012.

Baltic States lack VAT differences for foods, the sole exception being Latvia’s 12per cent VAT on baby food.

The Danes have to pay 25 per cent VAT. The situation is altogether different in Finland, Sweden and Norway – with considerably lower VAT rate on food products: 14 per cent in Finland (recently lifted) and 12 in Sweden.

Food VAT

•    Estonia – 20 per cent

•    Latvia – 21 per cent (baby food 12 per cent)

•    Lithuania – 21 per cent

•    Finland – 14 per cent

•    Sweden – 12 per cent

•    Norway – 15 per cent

•    Germany – 7 per cent

•    UK –  0 per cent

Sources: European Commission, Finnish tax board