Impact of VAT reduction on the commodity industry model

Impact of VAT reduction on the commodity industry model

22.12.2020

The impact of a one-time tax cut separately in the process of supplying primary agricultural products on the state of the processing industry will be negative. A decrease in the investment attractiveness of the sector and the creation of unequal conditions for market participants is expected.

The implementation of the legislative initiative to reduce the VAT rate only at the delivery stage, in practice, is fraught with risks for enterprises and other participants in the processing process in the agricultural market of Ukraine. Tulush Leonid – candidate of economic sciences and head of the tax and financial-credit policy department of the National Research Center «Institute of Agrarian Economics» made this opinion public.

It was discussed what the reduction of the VAT level to 14% for agricultural products will lead to when the bill No. 3656 “On Amendments to the Tax Code of Ukraine regarding the rate of value added tax on operations for the supply of certain types of agricultural products” will be adopted.

According to Tulush, as a specialist, despite the above declarations, they promise in such a scenario a benefit to both agricultural producers and processors; from the future implementation of the bill, it is the processing enterprises that will suffer the most. This is proved by the assessment carried out by the experts of the Institute.

For example, the document provides an argument as a benefit for processors regarding the date of payment of the total amount of VAT, will move from the moment of payment for raw materials to the time of payment of obligations of enterprises on the sale of products from these raw materials.

Here Leonid noted, that due to a decrease for credits to processors by the indicated amount, the corresponding amounts would have to be paid immediately. Therefore, the declared plus is actually bogus. According to him, manipulation of the VAT level is government interference in pricing, regardless of the delivery stage at which the rate is accepted.

To neutralize the negative impact of the changes, it is necessary to reduce prices by 5%, which is the specific weight of VAT accounted for. But the most significant factor remains the market power of both parties to the sale and purchase, which differs depending on the type of product.

Reducing tax liabilities aimed at reimbursing the tax credit will lead to losses for agricultural enterprises due to the rate cut. Therefore, according to the scientist’s forecasts, processors will try to compensate for this by maintaining the existing price with VAT.

If there is no decrease in the cost of agricultural products by the required 5%, there will be a decrease in the profitability of entrepreneurial activity as a whole, or enterprises will be forced to increase prices for manufactured products.

In general, the practical implementation of the bill will lead to an impact that discourages. After all, traders will lose motivation to work with the products of the processing industry due to a 30% decrease in the volume of freezing funds for payment of VAT, which is returned by the state.

The scientist Tulush also added that another negative impact of the initiative’s introduction would be the formation of an uneven functional environment for some groups of enterprises in the processing industry. After all, there is a possibility that due to the fragmentation of the business after the cuts in the tax level, part of the processing community will switch to a tax-free operation scheme. As a result, the consumer will receive agricultural products without VAT, and the participants in the new tax scheme will receive competitive advantages.

Summing up, the expert noted that without extending the reduced value added tax rate to agricultural products obtained after primary processing, the presented legislative changes could lead to a deepening of the raw material model of the country’s agricultural market development.