On Tuesday, the 28th of November, Latvian government supported the application of a reduced 12% VAT rate on fruits, vegetables and berries for a period of one year.
The existing 5% VAT rate for fruits and vegetables will remain in force until the 31st of December 2023. From the 1st of January 2024 onward the rate is planned to be set at 21%.
In order to set VAT at 12%, it is necessary to implement compensatory mechanisms of EUR 15.9 million. This is why the government intends to review excise duties.
Looking at multiple scenarios, one possible variant for compensatory mechanisms is the increase of excise duty for non-alcoholic beverages, raising the tax the most rapidly for strong alcohol, cigarettes, heated tobacco, smoking tobacco and tobacco replacement products.
Additionally, it is necessary to apply excise duty on natural gas used as fuel, specifically for businesses that meet “de minimis” requirement.
It is planned to increase excise duty for non-alcoholic beverages with sugar concentration of up to 8 g per 100 ml by 10.8%, as well as increase excise tax by 19.3% for alcoholic beverages with sugar concentration above 8 g per 100 ml and energy drinks. This way it is planned to secure EUR 1.7 million for the state budget.
The Latvian government also considers rapidly raising excise duty for cigarettes – by 15% or by 10 percentage points more when compared to the increase planned in the budget. This measure is planned to secure the state budget another EUR 5.1 million.
Excise duty is planned to be increased more rapidly for strong alcohol – by 8% or by 3 percentage points more then the increase planned in the state budget. This is planned to secure the state budget EUR 1.5 million.
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It is also proposed to clarify the slot machine number outlook, which is planned to secure the state budget EUR 2 160 300.
All of the proposed compensatory mechanisms are estimated to provide the state budget with EUR 12.9 million.
Another EUR 3 million is planned to be secured by lifting subsidies from fruit and vegetable producers.
Modelling different scenarios for the increase in excise duty on alcoholic beverages it was possible to assess the maximum marginal rate increase. The Ministry of Finance explains that if the rate is increased more rapidly, the difference in the level of excise duty between Latvia and Estonia would decrease and the border market would be lost. To compensate the loss of border trade of alcoholic beverages and beer, it will be necessary to raise the excise duty for all alcoholic beverages (except beer) very rapidly in 2024, as well as plan moderate growth in the coming years. Such a sharp increase of excise duty will cause a significant risk of illegal trade. This would also make excise duty on strong alcohol the highest in Baltic States. This means there is a high possibility of cross-border trade developing in the opposite direction.
The government ordered the Ministry of Agriculture to prepare an assessment of the effect the reduced 12% VAT rate will have on end prices of fresh fruits, berries and vegetables.
A comparison of actual prices in various stores of Baltic States shows that the VAT rate is not a decisive factor in the formation of prices, as noted by Ministry of Finance. Additionally, after the adoption of the reduced 5% VAT rate there was no significant growth observed in the sector. The amount of net taxes paid by the industry in Latvia leans towards zero – while in 2018 the net amount paid was EUR 5.9 million, then in 2022 it was EUR 0.3 million, because VAT refunds are up.
Currently, wages paid to agricultural workers do not reach the average in the sector, and the gap is growing. It can also observed that imports of fruits and vegetables in Latvia dominate (over 75%) domestic consumption, the ministry adds. If this trend continues, in 2024 imports could reach 80% in Latvia. In addition, the industry is dominated by the three largest importers, whose share exceeds 56%.
The Ministry of Finance believes the fruit and vegetable growing sectors should move towards standard VAT rate of 21%, and the Ministry of Agriculture should work on ways for the sector to develop in order to ensure significant support for local fruit and vegetable producers, as well as promote consumption of healthy food among Latvian residents.
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