Romania slashed its VAT rate on foodstuffs from 24% to just 9% on Monday, with the Finance Ministry claiming it should lead to a drop in the average VAT rate in Romania to about 17.5% - lower than Bulgaria, Hungary and Czech Republic.
It comes as a measure to stop tax evasion in the food industry; such activity could decrease by 30% to 40%, but may drop by as much as 70% if the tax authority ANAF continues checks and increases fines. It will also improve the unfavourable situation in the local dairy and meat industry which have been hit hard by a flood of imports from the rest of the EU following the embargo on Russia.
The rate cut covers food products, beverages (excluding alcohol), seeds, plants and ingredients used in food preparation, products used to supplement or reduce food, and restaurant and catering services (again excluding alcohol). We expect to see a growth in demand for local food products as the government aims to create a level playing field and boost economic growth locally.
The cut has not been met with universal praise; while the President of Romania’s Fiscal Council, Ionut Dumitru, says the drop in revenue will see less government money to spend on infrastructure and attracting new investment, the European Commission’s vice president for the Euro and Social Dialogue, Valdis Dombrovskis, says the measure will have a “significant negative fiscal effect”. The EC’s recommendation is to ease the tax burden on labour rather than targeting taxes with a direct impact on consumption.
From a compliance perspective all entrepreneurs dealing with foodstuffs affected by the change need to upgrade ERP systems to reflect the legislation change. It will include change of VAT ledgers to present the new rate as well as change on invoices (or receipts).
However, due to the negative comments expressed by European Commission as well as worries shared by the President of the Fiscal Council it may turn out that this reduction will be revoked soon due to negative financial impact on Romanian budget.
The situation in Romania should be monitored closely by any business dealing with foodstuffs, or keep in touch with our VAT team to hear the latest developments.
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