VAT Exemption Doesn’t Mean Food Price Slump
16 February, 2012
VAT Exemption Doesn’t Mean Food Price Slump

Georgian government hopes to cut down prices on Georgian agriculture product by about 18% through exempting primary provision of local agriculture product from the Value Added Tax. But Experts rule out any price slump in consequence of this initiative.  


The relevant changes to Tax Code were already initiated at the parliament last week.

“One of the key problems of population is increased prices. Government cannot control prices at supermarkets but will be trying to cut down prices through reducing tax burden,”

Giorgi Khuroshvili, Parliamentary Secretary of Government, said in the interview with Georgian Journal. “Based on our initiative the prime cost of the product produced in Georgia - fruits, vegetables, beef and pork will get cheaper by about 18% as the shops and supermarkets where farmers supply their product will no longer impose the Value Added Tax (VAT).”

Georgian economic analysts approve the initiative although do not expect general price slump either of net-cost of the VAT exempted agriculture product or food prices as such.

“First of all VAT is an additional component and not a direct constituent of the net-price of a product and its reduction depends on many other components except of VAT,” Shota Murgulia, an economic analyst with the Center for Strategic Research and Development, said.

Secondly, the farmers and agriculture business under GEL 100 thousand of annual turnover are already exempted from VAT. Taking into account that bigger part of Georgian agriculture farming fall within this scope the new VAT exemption is not supposed to have big impact on market prices, Murgulia goes ahead.

Irakli Lekvinadze, an economic analyst, agrees with the argumentation and adds that very few of big farming businesses operating at Georgian market handle with only primary product supply, most of them process the product too. Therefore they will not be exempted.

And the third reason is the overwhelming import infesting Georgian by nearly 90% that scarcely will be outweighed by insignificant share of local production to dictate market prices.

“There would have been much bigger effect if government  had reduced 18% of VAT rate by 2-3% or would be fixing lower tariffs on gas, water and electricity to companies that pay double higher tariffs for communal services [compared to households] at the moment. Since no product can be produced without gas, water and electricity their expenses are very big thus triggering prices on product to consumers ultimately,” Lekvinadze told GJ.

Murghulia believes that it is too early to assess the possible impact of the governmental initiative on prices since the bill is not elaborated as of yet and nobody can say for sure what calculation makes government think that prices can reduce by 18% if the promised VAT exemption comes true.

The only thing initiative stipulates by today is that primary production of local agriculture product [before they enters markets and supermarkets] from the list of national nomenclature goods are exempted from VAT with the right of deduction. However the initiative does not disclose the list of exempted goods. Absence of the exact list makes preliminary assessment of the economic impact of the new VAT exemption difficult. Moreover, there is no data how the share of petty farmers and cattle breeders [already exempted from VAT] compares with the share of bigger companies and slaughterhouses supposed to be potential beneficiaries of new exemption.

“Even if we knew all due data, it is ruled out that VAT cancelation could reduce net prices down by 18%, in the best case it can be just 15.25%. Let’s make a simple calculation. If a farmer supplied potato to a supermarket for GEL 1 per kilo for example and the shop after adding 18% of VAT in the value priced it as GEL1.18 for sale. Now if the VAT is removed and the price drops to GEL 1 it does not mean a 18% drop in sale price. Mind that the price reduces by GEL 0.18 that is 15.25% of GEL 1.18 not 18% as government says,” Murgulia elaborates.

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