Tax programs come into effect as countries tackle food inflation

03 Jan 2023 --- As 2023 begins, countries continue their attempts to tame inflation. Spain and some US states are reducing VAT food taxes, sacrificing potential tax revenue aiming to lower the more volatile food inflation that has hard-hit consumers’ pockets.

Meanwhile, Dubai is removing a 30% special tax on alcohol sales and making personal liquor stores licenses free. The move comes as the nation tries to attract tourism in a region where alcohol prices are sky-high. 

In contrast, Portugal has chosen to introduce a new tax that affects the food sector. The country will apply a 33% windfall tax for food retailers on every profit that exceeds the 20% threshold of the average profit of the past four years. 

Lowering VAT taxes
Spain is outright scrapping the value-added tax on essential foods for six months in order to lower food inflation, which remains at higher levels than the general price acceleration rate.

VAT will be reduced during six months from 4% to 0% on foods like fruits, vegetables, bread and dairy products and reduced from 10% to 5% on oil and pasta. However, meat and seafood will not benefit from any VAT discount. 

“We agree with the [Spanish] government’s move to maintain current VAT rates on meat and fish as these products are already being consumed above officially recommended levels. We do not believe that dairy products should be subject to reduced tax rates either,” Verónica Larco, communications manager at ProVeg Spain, tells FoodIngredientsFirst.

“We hope any tax changes for basic foods will be passed along by retailers and manufacturers of plant-based foods and thereby increase consumption of vegetables as well as products such as plant-based meat alternatives,” she continues.

Removing VAT in this way also supports a shift to a much healthier diet by facilitating access to fruits, vegetables, pulses, tubers and cereals, according to the organization.

Spain will also give one-off payments of €200 (US$211.56) for some families.“Tax moves like the one in Spain can also serve to level the playing field for the plant-based industry, which does not have the benefit of heavy subsidies that the meat and dairy industry has,” adds Jaczniakowska-McGirr, head of corporate engagement at ProVeg international.

Spain will also give one-off payments of €200 (US$211.56) for families with incomes of €27,000 (US$28.561) or less. 

Meanwhile, in the US, the state of Virginia, most food for home consumption will see its VAT taxes reduced from 2.5% to 1%. In Kansas, the grocery food tax will go down from 6.5% to 4%. Moreover, the state of South Dakota voted yesterday to remove sales taxes on groceries. 

Inefficient measure?
While removing VAT taxes directly affects prices when shopping for food, some argue that reducing this tax or outright removing it might do more harm than good for the poorest households. 

“Grocery exemptions are a middle-income, not a low-income, benefit – and middle earners can be more efficiently made whole through grocery tax credits,” says Jared Walczak, VP of state projects at the US Tax Foundation. 

“Exempting groceries from the sales tax base reduces economic efficiency without achieving its objective of enhancing tax progressivity,” he continues.

A US Tax Foundation study argues that giving personal credits to the poorest households makes more sense and better enhances the food security of low income families.

Dubai eases alcohol laws
Dubai aims to differentiate itself from neighbors Saudi Arabia, Kuwait and Iran that all outlaw alcohol by eliminating the 30% sales tax and only keeping a 5% VAT tax on alcohol. 

Consumers of alcoholic beverages will not be required to purchase a liquor license. However, it is a punishable offense under UAE law to drink or be under the influence of alcohol in public.Spain will halt taxation of dairy products, but will not do the same for meat and seafoods. 

Other countries in the region, such as Qatar, have heavy excise taxes that make alcohol prohibitively expensive.

Portugal taxes profits
The South European country has compared food retailers to energy companies, with finance minister, Nuno Felix, saying that some companies in both industries have had “excess profits in an inflationary context.”

The tax will apply for 2022 and 2023.

Food retailer Jeronimo Martin – owner of the largest supermarket chain in Portugal, Pingo Doce – revealed in its Q3 results that the company saw a 29.3% increase in net profits in the first nine months of 2022, while food inflation in the country was 10.8% in the same period (and accelerated to 15.2% in Q3). 

Free grain for the masses
India will continue to provide free subsidized grain for over two-thirds of the country’s population, or around 800 million people, until December 2023, in a multi-billion food program, under the National Food Security Act. 

Government officials calculate running the program for twelve months will cost approximatelyUS$24.14 billion. 

Food inflation in the country was 4.67% for November, 2022.

By Marc Cervera