The Importance of Value Added Tax and Reduced Rates in Latvia and Europe

The value added tax is a very old tax, invented after the Second World War and considered good and important.

In Latvia, it brings in about 30% of the budget revenues, so it is the second most profitable tax right after the compulsory contributions of the State Social Insurance.

Photo: Latvian Television

The EU VAT Directive stipulates that the standard rate of this tax cannot be lower than 15%.

The lowest rate among the EU member states is in Luxembourg – 16%, while the average rate in the countries of the bloc is 21%, which also corresponds to the choice of Latvia. The highest rate is in Hungary – 27%.

Photo: Latvian Television

Photo: Latvian Television

The tax system is like the work of a bee around a flower

Jānis Taukačs, partner of the law firm “Sorainen” compared the tax system to bees and honey: “The beauty of the tax system, in my opinion, is like a bee taking honey from a flower without harming that flower. And VAT is essentially taken in every period of creation of a product or service from so every stage has some part. If the system works perfectly, then of course everyone has paid their little bit almost without noticing it, and overall everything is fine.”

In order to cause as little damage as possible to this flower, VAT is given reduced rates. Once again, there is a framework defined by the previously mentioned directive. It envisages allowing member states to introduce reduced VAT rates – one not lower than 12% and the other not lower than 5%. However, it should be added here that

there is also a list of certain goods and services, such as health and hygiene products, passenger transport and, among others, food, which can be charged an even lower rate.

So this issue of reduced rates is up to the national governments.

They are mostly granted to support local producers and poorer residents. However, industry professionals emphasize that often this reduction in the VAT rate does not reach the consumer at all. One of the reasons is that it settles with traders.

“Even if these merchants reduce its prices, this also does not achieve their goal because a large part of the buyers are wealthy people. And in fact always the majority. Therefore, there are other mechanisms both through benefits and through, for example, the same non-taxable personal income tax the non-taxable part is an opportunity to support exactly this target audience, low-income residents, pensioners and the like,” Taukačs explained.

In addition, the reduced VAT rates cause quite a bit of controversy. For example, until recently at Christmas in England, there was a dispute about whether gingerbread is a food product or a sweet. Because a zero rate was applied to food products, while a standard rate was applied to sweets.

The situation is similar with the neighbors

In Latvia, spears are currently being broken over the cancellation of the reduced 5% rate for vegetables and fruits characteristic of Latvia. They were scheduled to return to the standard 21% rate from January 1, but due to pressure from the industry, the government backed a one-year rate of 12%. This will cost the state 16 million euros, which the government hopes to compensate by raising another excise tax rate. At the same time, it is still not what the industry hoped for.

If we compare with neighboring countries, the situation is similar, at least when we talk about rates.

The differences in the standard and reduced VAT rates are not too big, even if you take into account that Estonians plan to raise the standard rate. In Lithuania, for example, there are two reduced rates, but neither of them applies to food.

Photo: Latvian Television

However, it is interesting that most, especially the wealthiest EU countries, where the standard of living of the population is higher and therefore they could even afford to pay more, applies a lower VAT rate to food – and to a wider group of products. For example, in Germany they are 7%, in Luxembourg even only 3%. In Ireland, most food products are not subject to VAT at all.

Reduced VAT rates for food in European countries

Photo: Latvian Television

Counting on income from VAT is audacious

Last year, revenues in the Latvian state budget from VAT had increased to 3.5 billion euros, this year it was forecasted to be almost 3.8 billion euros, and next year already more than 4 billion euros. However, after applying the VAT rate for fruits and vegetables in the amount of 12% instead of 21%, the revenue from this tax will be 16 million less, the Ministry of Finance has predicted.

However, as the researchers emphasize, counting on such income is audacious. Namely, the higher the VAT rate, the greater the temptation for entrepreneurs to keep some of the money in their pocket.


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2023-11-30 18:15:42
#VAT #food #Latvia #highest #European #Union

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