Georgia Scraps Food VAT to Help Farmers

The Georgian government is hoping the abolition of value added tax, VAT, on certain foodstuffs will lower prices and develop the agricultural sector. Critics argue, however, that the absence of effective anti-monopoly legislation will prevent any meaningful price reductions filtering through to consumers.

Since March 20, VAT has been lifted from Georgian-produced fruit, vegetables, fresh meat and cheese. Supporters of the change said they were concerned that food prices were rising and that local products were not competitive against imported food, primarily from Turkey.

According to the State Statistics Service, Georgia imported nine per cent more food in 2011 than in 2010, reflecting the way imports are squeezing out local products.

“Thanks to the government initiative, prices on such foodstuffs as vegetables, fruits and meat will be reduced by 18 per cent – the VAT rate,” Gia Khuroshvili, the government’s parliamentary secretary, said. “This decision was taken to stop price rises in the marketplace, since the government cannot control prices in the shops.”

According to Petre Tsiskarishvili, leader of the government’s allies in parliament, the change should provide a boost to Georgia’s struggling farmers.

“Since transportation and processing of agricultural products has been freed from VAT, businessmen will have a greater motivation to choose Georgian products,” he said. “With time, Georgian products will replace the imports.”

But opposition politicians and economists, though largely welcoming the move, doubted its effect would be as dramatic as the government predicted.

“The government is lying. There will be no 18 per cent fall in prices,” said Levan Vepkhvadze, the deputy speaker of parliament from the opposition Christian Democrats. “The main suppliers of agricultural produce, judging by their annual turnover, were not paying VAT before this, so the changes won’t reduce prices by more than three to five per cent.”

Opposition parties outside parliament were even more cynical, seeing the reduction as a populist step to win support in the run up to a parliamentary election this autumn.

Levan Kalandadze, head of the economics section in the New Right Party, said the government needed to do much more to secure an improvement in the lives of farmers.

“In and of itself, the abolition of VAT is a good thing, from an economic point of view, but in this case it’s more like a pre-election PR stunt rather than a boost for agricultural producers,” he said.

“For small farmers to feel any benefit…. they must first produce something. And to do this, agricultural technology, fuel and fertiliser have to be available. Therefore, this new initiative from the government will not produce any economic result for the majority of people engaged in agriculture,” he said.

That opinion is shared by some independent economists, including Nodar Khaduri, head of macroeconomics at Tbilisi State University.

“The obligation to pay VAT only applies to those with a turnover of more than 100,000 laris [60,000 US dollars]. The majority of businessmen engaged in agriculture do not fall into this category,” he said. “And shipments of agricultural produce were already free from VAT.”

Others said prices would only fall for consumers if shops and retailers passed the savings on, which was not guaranteed in a country like Georgia without strong laws to enforce this.

“To understand whether VAT abolition has an effect on the cost of products, you need to monitor their prices before and after the tax change comes into effect,” Zurab Lalazashvili of the Association of Businessmen said. “Honest businessmen should pass the tax break on. Logically, prices should definitely fall. But in practice, this does not always happen.”

For now, imported food continues to crowd out Georgian products, simply because it is cheaper. Lalazashvili said this was largely because the government had no strategy for supporting agricultural development.

Government supporters shrugged off the criticism, however.

Mikheil Machavariani, deputy speaker of parliament from the ruling United National Movement party, said the cancellation would make everyone’s life easier.

“Before this, producers and traders used to have problems with documentation, so shops avoided buying products from local farmers,” he said.

Tina Zhvania works for Business Times Georgia magazine.