Minister proposes reducing VAT on food

  • 2005-05-25
  • From wire reports
RIGA - Economy Minister Krisjanis Karins said he would ask the Cabinet to lower the value-added tax on food products from 18 percent to 5 percent as a means of stemming the rapid growth in food prices and combating overall inflation in the economy.

Karins told the Baltic News Service that ministry estimates show that by cutting the VAT on food, inflation could be reduced by as much as 2.5 percent. He pointed out that people in Latvia spend a large part of their income on food, and it will be mainly the low-income part of the population that will benefit most from the reduced rate.

Consumer prices in Latvia this April grew 1 percent over March and 6.9 percent from April 2004. There are concerns that inflation will continue at the same rate and spark a rise in natural gas prices and heating tariffs.

Worse, the high inflation 's among the highest in the EU 's may prevent Latvia from introducing the euro in 2008 as planned.

Karins said that the difference in revenues to the state budget as a result of the proposed VAT reduction could be compensated from general tax revenues, which, according to Economy Ministry forecasts, could be as much as 125 million lats (177.8 million euros) more than the Finance Ministry is planning.

As part of the battle against inflation, the economy minister will also ask the government to introduce the VAT on heating services not from July 1 this year but from July 1, 2006.

The Latvian Federation of Food Producers recently sent a letter to the government requesting that VAT on food products be lowered to 5 percent. The federation said that Latvia had one of the highest VAT rates on food in all of Europe and that a number of other European countries already apply reduced VAT rates to food or at least certain categories of food.

The reduced VAT rate of 5 percent was introduced in Latvia last year upon the country's accession to the EU in order to support socially sensitive goods and services or industries requiring special support. At present the reduced rate in Latvia is applied to medicines, books, mass media, water supply, and public passenger transport.