Tax Analysis Showed That VAT Reduction Did Not Result in Equivalent Price Decrease

After the expanded application of the reduced value-added tax rate in the spring of last year, the Tax Administration determined that taxpayers on April 1, 2022, did not lower the prices of their products by the amount of the reduced VAT rate, but instead used it for increasing margins or business costs, and by the end of that month, there was a further increase in prices, according to their analysis published on Tuesday.

The Tax Administration reminds that as part of the package of measures to mitigate the rise in energy prices in the spring of 2022, the VAT Law was amended.

Thus, from April 1 of that year, the application of the reduced rate of this tax was expanded from five percent to baby food, edible oils and fats, butter and margarine, the supply of live animals, the supply of fresh or chilled meat and edible slaughter products, the supply of fresh or chilled sausages and similar meat products, the supply of live fish and fresh or chilled fish, crustaceans, mollusks, and other aquatic invertebrates, the supply of fresh or chilled vegetables, roots, and tubers, the supply of fresh and dried fruits and nuts, the supply of fresh poultry eggs (in shell), seedlings and seeds, fertilizers and pesticides, animal feed, tickets for concerts, sports and cultural events, and from 13 percent on natural gas and heating from heating plants, firewood, pellets, briquettes, and chips, as well as menstrual products.

According to the Tax Administration, it is estimated that this reduced the state budget revenue from VAT by 2.1 billion kuna annually, or 279 million euros. The Ministry of Finance, they remind, undertook the obligation to conduct a subsequent assessment of the regulatory impact within two years from the date of entry into force of these amendments.

At the end of January this year, the Tax Administration therefore requested 33,939 entrepreneurs to report on how they determined prices for certain products subject to the reduced VAT rate.

Data was provided by 29,940 of them, and through their analysis, the Tax Administration determined that taxpayers did not lower prices by the amount of the reduced VAT on April 1, 2022, compared to the previous period, but instead used the VAT rate reduction to increase margins or business costs.

Specifically, of the total number of entrepreneurs who provided data, 27,757 stated that they do not sell products subject to the reduced VAT rate.

Of the remaining, 33.21 percent of entrepreneurs, or 725, stated that they lowered sales prices by the amount of the reduced VAT, 34.04 percent or 743 stated that they maintained existing sales prices, and 32.75 percent of entrepreneurs, or 715, stated that they determined individual prices depending on specific products.

As the analysis shows, those entrepreneurs who lowered prices on April 1 compared to March 31, 2022, did not lower prices by the percentage of the reduced VAT.

Namely, the Tax Administration states that the prices of products for which the VAT rate was reduced from 13 to 5 percent should have been lower by about 7 percent, while for menstrual products for which the VAT rate was reduced from 25 to 13 percent, the price should have been lower by about 10 percent. From the analysis published by the Tax Administration, it is evident that, for example, the prices of menstrual products on April 1 last year were reduced by 9.04 percent, while live fish were reduced by 6.47 percent, fresh or chilled vegetables by 6.82 percent, fresh or chilled sausages by 2.49 percent, etc.

Additionally, the Tax Administration notes that the analysis showed that besides the fact that prices on April 1, 2022, were mostly maintained or increased, there was already a further increase in prices for these groups of products by April 30, 2022.

Therefore, based on the conducted analysis and subsequent impact assessment, they conclude that it is evident that the expansion of the application of the reduced rate cannot ensure the desired effects of price reductions for the covered products.