VAT exemption for a basket of 46 food products will come into force next year

The government will not extend the VAT exemption for a basket of 46 food products, effective from April 18, in accordance with the 2024 state budget proposal.

This is precisely what emerges from the report accompanying the thesis, which explains that “in the tax with the highest tax expenditure, VAT, the change in tax expenditure is mitigated by the abolition of the zero VAT policy for food products, which will be in force until December 2023.”

“The evolution of VAT revenues registers an increase of 8.4%, i.e. 1,906.9 million euros. An assessment that “reflects the government’s proposed policy measures for 2024″: on the one hand, channeling support into the food sector for families most in need, by replacing zero VAT in the food basket, with strengthening social benefits,” the Government explains.

The possibility of continuing the VAT exemption measure was still under discussion, but the government based its option on changes in price paths.

“The average price increase through April 2023 remained above the maximum recorded between 2012 and 2021 and the 2022 average. However, in recent months there has been a more significant decline in inflation across all categories, which should reflect, at least in part, the introduction of the zero VAT measure in force from 18 April 2023.”

This reduction, he notes, is “particularly evident in the oils and fats class, where the measure results in a reduction in the VAT rate from 23% to zero”, being “less obvious in the sub-groups relating to goods not covered (sugar, confectionery and similar products and soft drinks).

“The entry into force of the measure also coincides with the sharpest decline in the contribution of food products to the overall CPI. In fact, there has been a different evolution of covered basket prices since the measure came into force: an estimated 4% reduction between August and April (compared to a 0.7% increase in the non-covered basket)”, “evidence supporting the transfer of the VAT suspension to consumer prices “

From the government’s point of view, “the effects of the introduction of zero VAT are strengthened by global factors leading to easing inflationary pressures”, including the gradual reduction of disruptions in international trade (including through the Black Sea Grain Export Agreement), the slowdown in energy prices (which, however, remain above 2019 levels) or a decline in demand caused by inflation and rising interest rates.”

“Indeed, despite a slight increase in July, which may be associated with Russia’s suspension of the Black Sea agreement, the latest data confirms the general trend of slowing prices for food raw materials and producers,” the government emphasizes, drawing from the price index of the Food and Agriculture Organization of the United Nations (FAO ), which in August was 11.8% below the level of the same month in 2022.

“In Portugal, as in the euro area, producer prices for agricultural products have been declining consistently since last year. In August 2023, the annual growth rate was 3.4% (average 28.5% in 2022),” he says. , noting that “the slowdown also extends to industrial production prices associated with the food and beverage sector, which have seen negative monthly fluctuations since March.”

Thus, “expectations for the change in sales prices of food industry companies in Portugal are well below their historical average since March, despite some recovery in recent months”, therefore “given the strong correlation that these expectations represent with food inflation over the six months.” ago, its recent dynamics suggest a significant slowdown in consumer prices in Portugal in the coming months,” he explains.

The temporary VAT exemption came into effect on April 18 following an agreement between the government and the Portuguese Association of Distribution Companies and the Portuguese Farmers’ Confederation, with an initial cost estimate of around €410 million, in addition to a projected additional VAT exemption. 140 million euros related to the recent two-month extension, until December 31, of this policy.