VAT cut slices bread prices and heralds whiter market

Newsroom 09/09/2013 | 10:03

Some 75-80 percent of Romanian bakery companies cut bread prices by 15 percent last week after the VAT dropped by 15 percentage points to 9 percent, announced PM Victor Ponta. While the price reduction is a welcome move and was keenly publicized by some producers and retailers, the authorities say the main objective targeted by the tax cut is to help good-faith players in an industry engulfed by tax evasion, which reaches a whopping 67 percent share of the bread market, according to the Romanian Employers’ League of the Milling, Bakery and Flour-Based Products Industry (Rompan). This should be reduced to about 20 percent in about six to eight months, according to the same source.

The Ministry of Agriculture and Rural Development also estimates that the VAT cut for bread products will double the quantities of legally sold flour and bread to 2.8 million tonnes and will increase the number of legally employed workers in the industry by 8,500.

“The VAT cut mainly helps create a healthy competitive environment; it helps save several large producers who were on the brink of insolvency because they couldn’t cope with the tax evasion any longer. It helps save jobs in the bakery industry (…) and last but not least it helps the public by lowering prices,” said Constantin last week, adding that while producers cannot be forced to reduce prices, market mechanisms should lead to this.

Knowing which side their bread is buttered on

On the downside, the VAT cut will mean less money for state coffers, at least on the short term. On the longer run, the government expects that this will be offset by reducing tax evasion which in turn should generate even higher revenues for the state budget. Until that happens – if it happens – the government has had to raise other taxes in order to balance the books and get the green light from the International Monetary Fund. It has opted to increase excise taxes on alcohol and luxury products such as gold, yachts and cars with engines over 3,000 cubic centimeters. This could lead to boomerang effect fears as the local alcohol industry, just like the bakery industry, struggles with one of the highest levels of tax evasion – between 60 and 70 percent. This means annual losses of EUR 750 million (in unpaid VAT and excise taxes) for the state budget, according to the Employers’ Organization of the Alcohol and Alcoholic Beverages Industry (Garant).

The 15 percent VAT cut on bread applies to the entire production chain – wheat, flour and bread – and finally came into force last week after having been debated for more than a year. It is a temporary measure, but should the target to reduce tax evasion and offset any budgetary losses be met and the experiment prove successful, it could be maintained and extended to other sectors such as vegetables, fruit and meat, hopes the agriculture minister.

The best thing since sliced bread

The VAT cut was welcomed by the bakery industry, with producers calling it a breath of fresh air. Vel Pitar, one of the largest Romanian bread producers, ran a TV campaign announcing the 15 percent price cut and giving a phone number where customers can report retailers that do not implement the reduction. The main grocery retailers also announced price cuts. Carrefour Romania sliced prices by the 15 percent and an additional 5 percent.

While Romanian producers are more than happy with the VAT cut, the measure has caused concerns across the Danube in neighboring Bulgaria. The Bulgarian market could be flooded with cheap Romanian bread following the VAT cut and also due to lower energy costs, complained producers, according to local media reports. They are calling on their government to follow suit and cut VAT. At present Bulgaria has an undifferentiated VAT rate of 20 percent.

Simona Bazavan

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