The refusal of the 5% value added tax rate for fruits and vegetables is a “slap in the faces” of local farmer, consumers of local products, as well as traders that have been fighting dishonest competitors working in the grey economy all this time, says Latvian Fruit and Vegetable Traders Association.
The organisation’s representative – Uldis Jaunzems – admits that he was surprised to hear Minister of Agriculture Armands Krauze publicly say he supports the idea to bring back a 21% VAT rate for fruits and vegetables despite the fact that when he was in the opposition, he promised to fight for the sector, not against it.
“What’s even more confusing is that several months ago the Ministry of Agriculture had proposed preserving the reduced VAT rate for fruits and vegetables based on various performance indicators,” the association reports.
“The minister at the time stressed that after looking into the efficacy of the VAT rate, it is important to take into account the Covid-19 pandemic, the price of resources and the war in Ukraine. Clearly politicians need a reminder that in spring farmers in all of Latvia’s regions were struck by freezing temperatures, and then in summer there was intense drought,” said Jaunzems.
“It turns out our fight against the grey economy has been futile. It is beneficial to the state if the grey market returns to the wholesale market.
It is unfortunate that the full impact of the absurdity of this decision will strike local farmers and local consumers. The local farmer will be forced to reduce the volumes of produce because residents will no longer be able to purchase their products,” says Jaunzems.
By dropping the 5% VAT rate on fruits and vegetables, Latvia’s economy will feel multiple severe negatives. This means a rapid resurgence of grey economy, because local wholesale producers will be unable to compete with competitors from neighbouring countries.
“Thanks to the reduced VAT rate, our farmers are able to compete with imported products. Before then (in 2018) the sector had a very large grey economy presence. Often vegetables, berries and fruits claimed to be locally produced were imported to Latvia. On top of that, the tax difference between Latvia and Lithuania or Poland was often abused,” comments Jaunzems.
The situation is better with prevention of grey economy in the sector now. Residents are also now more aware of fakes and can more easily distinguish between locally grown and imported fruits and vegetables.
Minister of Agriculture Armands Krauze’s opinion contradicts the ministry’s report submitted this year. The minister publicly said this week that reducing the VAT rate on fruit and vegetables has encouraged “massive consumption of imported produce.”
“This claim is untrue and clearly indicates the minister either has no idea about the situation or he has not studied the sector’s specifics
and this year’s report from the Ministry of Agriculture. Until 2018 a large portion of imported fruits and vegetables did not show up in statistical data, which was because of the large level of grey economy. It was after the adoption of the reduced VAT rate that the real volume of imported vegetables and fruits had really surfaced, because it was no longer economically beneficial for traders to hide their volumes. This was the point of the reduced VAT rate,” said Jaunzems.
However, the Ministry of Agriculture concluded in its summer report, between 2017 and 2022 this sector of Latvia’s economy had developed significantly.
Fruit and vegetable production areas increased by 5%, the value of production increased by 46%, and the value of export – by 77%.
“Fruit and vegetable-growing sector in Latvia develops more rapidly than average in the EU. The value of sales of fruits and berries in Latvia have doubled, putting the country third in the EU after Luxembourg and Slovenia. The value of sales of vegetables in Latvia is 25% up and is above the average EU level. The value of sales of potatoes in Latvia is up 57%, putting the country sixth in the EU. Looking at the situation in the fruit and vegetable production sectors since the reduction of VAT to 5% for fruits, berries and vegetables, it can be concluded that the adoption of a reduced VAT rate was worth it, because it had a positive effect on the sector,” the report mentions.
By restoring the VAT to 21%, the Ministry of Finance will only hurt Latvia’s agricultural sector, the association says.
Also read: Latvijas Radio: ZZS “forgets” about its own proposal to reduce VAT for food products