Statement by PM Victor Ponta – VAT rate on all food to be cut down to 9% starting June 1st

The Cabinet has reached a decision today regarding a cut in the VAT rate on food. The tax will be reduced down to 9 percent starting this June, six months ahead of schedule as the new Tax Code is only going to be enforced in 2016. The Cabinet has analyzed two scenarios: an overall reduction of VAT rate or a lower VAT on food products only.

Victor Ponta: I want to make sure, by this decision, that food will no longer be a hardship for citizens with low income in Romania, in 2015. I would like to make a short presentation regarding our firm intention to cut down VAT rates, both the standard quota as well as the VAT on food. It is well-known that most European countries have a low VAT rate on food – Bulgaria – 9 %, Slovakia – 10%, Austria – 10%, Italy – 10%. We have 24 %. In my opinion, after three years as chief of this Cabinet, the decision back in 2010 to raise the VAT from 19 to 24 % was without any doubt the biggest mistake  the Romanian state has made and it reflected in lower tax collection – there was no 5 percent raise in collection as stated – and this finally brought social and economic distruction for Romania. This is the reason why our governing program in 2012 targeted VAT reduction as one of the main objectives.
I would like to present now the situation at the end of the first quarter of 2015 in terms of budget execution – I hope the graphics are ready.
So, public revenue was 48 billion RON last year, the budget endorsed by the Parliament stipulated 50 billion and the collection level is situated now at 53 billion. Which means people worked harder and paid their taxes more correctly if I may say. Please note that during one quarter – without tax increases, moreover with a 5 percent reduction of the health insurance contribution (CAS) which was said to destroy Romania – we now have 5 extra billion. One extra billion in the first quarter of 2015 only, against the first quarter of 2014.
Public expenditure is maintained in last year’s range although higher expenses had been forecast. This is due to both positive and negative reasons and I would like to make an appeal especially in what large investment projects are concerned, even if the weather is bad, to try and get things going. Transport Minister Ioan Rus and I have finally managed to sign the documents for the ring road of Bacau city. I understand that a new bidder for Transilvania Highway was chosen – a highway that was started 10 years ago and then put on hold bereft of reason – now we have an investor and financing and we can finish it. All other works and European fund absorption are equally important. In other words, instead of a 5 billion RON deficit agreed with international institutions we are now having 5 extra billion which is a good thing, but it can turn into a big mistake if we keep this money in the Central Bank. I spoke the other day with the Central Bank Governor and the Goverment has 18 billion RON in the Treasury account. We only get 0.3 percent interest for this money. It’s almost zero interest, but anyway, all the better we are not obliged to give money.

This was the background for our debate regarding a cut in the overall VAT or in the VAT on food only.

Following talks with the Finance Ministry, the Central Bank, the IMF and the European Commission and of course under the pressure of the Agriculture Ministry we have finally made a decision.
We are going to approve an emergency ordinance today stipulating that VAT rate on all food products, not only the five basic ones, but on all agri-food products in Romania will be 9 %. Non-alcoholic beverages are included. Alcoholic beverages cannot be included as the EU Directive does not allow us, but in any case it is wiser to make this effort in what food is concerned. I would like to stress this out once again, as the reduction was initially intended for meat, eggs and dairy products. We are now including all food products as it would have been extremely difficult altogether to manage the exceptions from the fiscal point of view.
Another important mention is that we also included all public food services, after final talks this morning, in order to ensure consistency of the measure. Otherwise it would be pointless to buy meat with a 9 % VAT and sell it in the restaurants with 24% VAT.
In a nutshell, all agri-foods, non-alcoholic beverages and public food services will be subject to the 9% VAT quota starting June 1st.
At the same time, I would like to point out, based on the new Tax Code that we sent to the Parliament  – and I hope it will be endorsed by June – that we are willing and we have the resources to cut the overall VAT rate down from 24% to 20% starting January 1st 2016.
It would have been difficult to enforce both measures all at once as it would have created havoc in public finances and the budget, but we can surely implement them one step at a time.
I would like to be very clear about the substantiation of our decision, as there are surely arguments in favor of each measure, but we have finally chosen to cut down the VAT level first on all foods, non-alcoholic beverages and public food services at 9% starting June because the measure is clearly sustainable, meaning we have the money.
The estimated yearlong cost impact is situated at 5 billion RON. As you noticed, we already have this money at the end of the first quarter. Nobody can say this is some kind of adventure or that we are jeopardizing any balance. We have clearly assumed the goal to comply with all budget targets and European commitments. Being a global measure on all foods, it will be easy to manage from the fiscal point of view. If it had only been applicable on certain categories, it would have been hard to manage. Now we clearly know all food is on a 9 percent VAT.
Another aspect  I make a point of presenting concerns the percentage of food expenses against incomes in Romania: 32%. For lower incomes, compared to the European average, we have similar food prices with the rest of Europe. 32% of an average family’s income in Romania is spent on food. This VAT reduction will have to reflect in prices accordingly. I call for a collective effort of all institutions and relevant ministeries to make sure after June 1st that this 15% reduction is also reflected in prices and not only in traders’ profits.
Back to substantiation, now, I want to remind you that the agri-food industry is one of the biggest sources for tax evasion. On one hand, the Tax Administration ANAF is already conducting anti-fraud controls and I encourage them to conduct these operations firmly, but without abuse. We are exerting control but we also have to show support. And the new 9% VAT quota is one that absolutely each and every honest trader will be able to afford without the risk of bankruptcy or losing competitiveness At the same time – of course, we are in the EU and we are not allowed to treat Romanian products differently, but I want local products to become competitive at their best. Let us boost local production, support local producers – including traditional products or bioproducts – everyone that can benefit from this 9% VAT. This would be a fundamental support for them and a way of achieving one of two essential goals in Romania: food security alongside energy security. A country that reaches food security and energy security can only hope for democractic prospects of development.
At the same time, we have set a goal to create fiscalised jobs in agriculture, in the agri-food industry and public food service. There have been consultations with the Central Bank, the European Commision, the IMF and we are not expecting too many congratulations but the point is they have understood our medium and long-term strategy. As long as we prove the strategy sustainable there will obviously be no objections.
I finally want to stress out that the new VAT level on food will entail a 17.5 % average VAT quota in Romania, as food products represent a significant percentage. 24% standard VAT, 9% VAT on food products. Bulgaria has a 19,8% average VAT, Hungary – 23,5 %, The Czech Republic – 19,4%, Slovakia – 18,6%.

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