Stores may opt to keep food prices unchanged after VAT increase

Sausages in a supermarket.
Sausages in a supermarket. Source: Priit Mürk/ERR

Not all stores in Estonia will be able to change the prices of all their goods at the point of sale on January 1, when VAT is set to increase by two percentage points. According to Nele Peil, head of the Estonian Traders' Association, this may mean that the prices of the most important and cheaper foodstuffs remain unchanged for the time being.

"There are likely to be a number of products through which retailers themselves will attempt to make up for the VAT increase, but this will be a limited range of products. My prediction is that the prices of products in the cheaper price categories, such as milk, eggs, bread and some vegetables, will not change as a result of the VAT increase. Traders will simply increase the prices of goods in some other categories by more," Peil said on ETV show "Terevisioon" on Wednesday.

On the same show, Ulrika Paavle, head of the Consumer Protection and Technical Regulatory Authority's (TTJA) business department, explained that the authority has suggested that shops could begin displaying both current prices and the price after this fall's VAT increase. However, Peil said this would not technically be possible.

"There are two alternatives. Stores could absorb the total cost [of the tax increase] in January until they get their price labels changed. This could happen quickly in some stores, but certainly not in grocery stores, as this is a very low margin business, which means that there they would have to pass on the entirety of this additional cost directly to the consumer. The other option would be to raise prices earlier [for goods] in some categories. This would mean that each week only the prices of some of the goods are increased, with prices adjusted at the same rate as the price labels are changed," said Peil.

According to Paavle, retailers are free to decide to raise prices, with no interference from the state.

"It is up to the retailer to decide how to offset their costs - it doesn't matter whether they are increased due to higher electricity prices or VAT. We have proposed an option whereby it would be possible to avoid the impact of the VAT rise before the actual increase comes into effect, but I do understand that this would mean extra work and costs for stores. Retailers are free to choose how to do that and I also understand that retailers are not planning to raise all their prices equally, but because the competition is tough, they are probably going to keep the goods that are more important to price-sensitive people lower and instead raise the prices of other goods, which are less susceptible to competition."

Peil also said that prices of fashion items may remain largely unchanged, with retailers forced to bear the impact of the VAT increase themselves. This is because major brands often indicate in advance the at which their products are to be sold. "Fortunately, clothing stores also have slightly higher margins than grocery stores," Peil added.

Peil additionally pointed out that not all stores will simply be able to use electronic price tags because they are too expensive and introducing them would necessitate raising prices even more than the upcoming VAT increase requires.

From January 1, 2024, VAT will increase from the current 20 percent to 22 percent.


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Editor: Michael Cole

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