Effect of VAT rate reduction for fruits and vegetables on prices in Latvia: ex-post analysis
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Latvia reduced Value Added Tax (VAT) rate for some fresh fruits and vegetables in 2018. The reduced VAT rate is set at 5%, while the standard VAT rate in the country is 21%. The rate was reduced for a 3-year period, during which it is intended to assess the impacts of the policy and to decide whether to keep the reduced VAT rate after the period ends. This research aims to evaluate whether VAT reduction reduced retail prices of fruits and vegetables. As prices on various fruits and vegetables are quite volatile, we used prices for exactly the same products in neighbouring Estonia and Lithuania as controls. We found that although in the first year after the VAT reduction retail prices decreased considerably, the decrease was smaller than the VAT reduction – the passthrough effect was 88%. However, due to the limited competition in the retail sector, it is important to continue observation in order to draw conclusions about the long-term effect.