Sky-high Value Added Tax (VAT) on food items in Latvia puts it amongst the European Union nations with the highest such rates.

Sky-high Value Added Tax (VAT) on food items in Latvia puts it amongst the European Union nations with the highest such rates.

News Article: VAT Rates and Their Impact on Budget Revenues in Latvia

In Latvia, the value-added tax (VAT) plays a significant role in the country's budget, contributing approximately 30% of the revenue. This makes it the second most profitable tax after mandatory State Social Insurance contributions and the third is personal income tax. Last year, revenues from VAT in Latvia's state budget were approximately 3.5 billion euros, with forecasts of nearly 3.8 billion euros this year and over 4 billion euros next year.

However, the government is facing a challenge as it seeks to compensate for a potential loss. One solution being considered is raising the excise tax rate. This move, while potentially increasing government revenue, may have broader implications for consumers and businesses.

The EU VAT Directive allows Member States to introduce reduced rates of VAT, one not higher than 12% and the other not lower than 5%. In Latvia, the reduced VAT rate for locally grown vegetables and fruits was scheduled to increase from 5% to 12%, but due to industry pressure, the government has extended the 12% rate for one more year, costing the country €16 million.

This extension is not without controversy. The fruit and vegetable industry in Latvia has expressed concerns that a higher VAT rate on produce will lead to an increase in the shadow economy. On the other hand, researchers warn that relying on VAT income can be risky, as higher VAT rates may encourage entrepreneurs to retain some of the money.

The current VAT rates for 2025 are as follows: Latvia has a standard rate of 21% with reduced rates of 12% and 5%; Lithuania has a standard rate of 21% with reduced rates of 9% and 5%; Estonia has a standard rate of 24% since 01.07.2025, with an additional 13% rate for certain services such as accommodation. Thus, Latvia and Lithuania share the same standard VAT rate but differ in their reduced rates, while Estonia has a higher standard VAT rate than both Latvia and Lithuania.

Interestingly, most wealthy EU countries, such as Germany and Luxembourg, apply a lower VAT rate to food and a wider group of products. Germany has a 7% rate, while Luxembourg has a 3% rate. This lower VAT rate on food is intended to support consumers and local producers, but it remains to be seen whether a similar approach would be beneficial for Latvia.

Jānis Taukačs, a partner of the Sorainen law firm, compared the tax system to bees and honey, suggesting that VAT takes a small part from each stage of the product or service without causing significant harm. However, it is clear that the impact of VAT rates on budget revenues is a complex issue that requires careful consideration.

There are other mechanisms, such as benefits and non-taxable parts of personal income tax, to support low-income populations, pensioners, and similar groups. As the government seeks to find a balance between revenue generation and consumer affordability, these alternatives should not be overlooked.

In Ireland, most foods are not subject to VAT at all. This approach, while reducing government revenue, could potentially help to lower the cost of living for consumers. It is a strategy that Latvia may want to consider as it navigates the challenges of tax policy.

In conclusion, the VAT system in Latvia is an important source of revenue for the government, but it is not without its challenges. As the government seeks to compensate for potential losses, it must carefully consider the impact of its decisions on consumers and businesses. The debate over VAT rates is likely to continue as policymakers strive to find the best balance for the country's economy.

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