However, the impact could be minimised if the authorities decide not to withdraw lower VAT on food products, though this decision has yet to be taken.
Russian analysts anticipate that domestic meat prices in Russia would rise 3-7% in the event of a rise in VAT.
“Experience has proven that prices will start rising in advance of the VAT hike. The VAT rate on food will be kept lower, but taxation will be increased in related sectors, which will ultimately affect production costs for meat,” Konstantin Korneev, executive director for consulting agency Rincon Management, told GlobalMeatNews.
It is hard to forecast by how much prices could rise, as there is oversupply in several sectors of the meat market, according to Korneev. As a result, the increase in prices is unlikely to correspond directly to a rise in production costs, he added.
Oversupply is already happening in the domestic poultry market and is likely to start in the pork sector soon.
“In this case, the position for some meat manufacturers could become more complicated, especially with a background of rising prices for feed grains in Russia. In poultry farming, the average profitability for small farms ranges between 2% and 5%. Also, the rise in prices could see a drop in demand for meat in Russia,” said Korneev.
The VAT hike is likely to be “the nail in the coffin” for some inefficient farms, which have struggled to stay afloat over the past few years amid tightening competition in the domestic market, a Russian meat producer who wished to remain anonymous told GlobalMeatNews. The rise in taxation would be much more painful for small and medium-sized businesses, so it would probably trigger further consolidation in the Russian meat industry, he added.
Discussions on lowered VAT
Food and some other products in Russia are subjected to a lower rate of VAT, ranging between 8% and 10%. This translates into a tax break for the food industry to the tune of some RUB300 billion (US$5bn), with the meat industry accounting for a significant proportion of this figure.
Russia’s Ministry of Finance has been lobbying for a cancellation of the lowered VAT, suggesting it be replaced with special aid for the poorest citizens. However, Valentina Matvienko, chairman of the Federation Council, the upper chamber of the Russian Parliament, has promised the lower VAT will be kept in place for the time being.
In a statement published in the Russian Gazette, the official publication of the Russian Government, she claimed the lower VAT was important for low-income consumers.
Meanwhile, one Russian media outlet, citing its source as the federal government, reported that discussions on the cancellation of the lower VAT had been put on hold, but not abandoned completely, as “there are already too many unpopular measures on the pipeline now”.