Will a VAT-free regime cut prices on farm products?
The Georgian government has introduced an initiative where agriculture products produced in Georgia will be free from value added tax (VAT), including prior to industrial processing. While the government expects that this measure will help cut the price of agriculture goods by 18%, some economists disagree.
Yet the announcement is being met with criticism by those who say it doesn’t cheapen the agro products because most of the agriculture products produced in Georgia are currently free from VAT already and only a few farmers or legal entities charged with VAT will benefit from the new rule.
Under the existing rules, if a company has less than a 100,000 lari annual turnover, it is not obliged to register as a value added tax (VAT) payer. In addition, all agriculture export products are free from VAT.
In 2010, agriculture accounted for 8.4% of the Georgia’s economy and made up 55% of the work force. The majority of those involved with agricultural related activities are small farmers.
According to Geostat, Georgia’s national statistics office, the annual production of Georgian agro products is 2.5 million lari and roughly 70% of all produced products are not charged VAT.
The Parliamentary Secretary of the Government, Gia Khuroshvili, commented that in the current market economy conditions, the government has no right to control the prices, but they strive to ease the tax burden. “A VAT-free regime for agro products will support the development of local farming and will also cut prices,” he noted.
Analysts confirm that for the most part, the initiative is positive but claim that the government’s expectations are “too high.”
Shota Murgulia, the Economic Analyst at the Center for Strategic Research and Development, a local think-tank, says that VAT cancelation will not reduce costs by 18%.
According to Murgulia, in the best-case scenario, the decline in price could be no more than 15.25%. “For example, if a farmer supplies a supermarket with tomatoes at 1 lari per kilo, after adding the 18% VAT to the value, its cost will be 1.18 lari. If after the new initiative the VAT is removed, the price drops to 1 lari. This does not mean an 18% drop in sale price. We have to consider that the price decreases by 0.18 lari which is 15.25% of 1.18 lari and not 18% as the government says,” Murgulia told Georgia Today.
Accordingly, the economists and farmers think that as most of the farmers in Georgia are small enterprises having below a 100,000 lari annual turnover, the new initiative wouldn’t have a considerable positive impact.
“The price decrease or increase depends on the supply and demand changes; so if the initiative is to be implemented, it would only cut prices slightly,” said Shalva Beboshvili, founder of Green Basket, a company that owns tomato and cucumber greenhouses in Sagarejo, an agricultural region of Georgia. His company, which he runs together with the London Investment House, a UK-based investment company, is a VAT payer.
Moreover, representatives of companies that buy their local agriculture product from farmers say that after the new initiative, nothing will have changed for them. Between them is Kula, a Georgian company that produces several varieties of fruit juices, traditional marinated vegetables, canned vegetable salads and various types of jams and fruit preserves.
Luda Gavrilenko, the Chief Accountant and Manager of Kula, told Georgia Today that cancelling VAT for small producers does not change the final picture in terms of prices. “In such cases the tax burden is shifted to those big companies who are VAT payers so the tax burden is still distributed among the units that are involved in the production process,” Gavrilenko explained.
By Tamar Khurtsia