A zero rate on fruit and vegetables? Better to turn back halfway

EU law no longer stands in the way of a zero rate on fruit and vegetables. But will the measure deliver what is expected of it? We do the arithmetic.

On 15 December 2021 the Dutch coalition parties presented their agreement, which includes examining whether the VAT rate on fruit and vegetables can in time be reduced from 9% to 0%.

For a long time a zero rate was not possible under EU law. A reduction to 5% was the most that could be achieved, but introducing a new 5% rate could not be delivered quickly by the tax authorities' IT systems. On 7 December 2021, however, member states agreed to allow more freedom on rates. That agreement, which among other things permits a zero rate on certain foodstuffs, was formally adopted on 5 April 2022 and took effect the following day. EU law is therefore no longer an obstacle.

Where to draw the line

The government is now examining the change and has undertaken to make every effort to introduce the zero rate during this parliamentary term, and to inform parliament of an implementation plan before the summer.

The reason it cannot happen immediately is the difficulty of drawing the line. At present the sale of food and drink, other than alcoholic drinks, is taxed at 9%. A zero rate for fruit and vegetables means that category has to be delimited. But how? Only unprocessed fruit and vegetables? Or also processed products such as dried pulses, a tin of tomato purée, pre-cut fruit and vegetables or a bottle of fresh juice? And what about meal kits or salads that contain meat, fish, herbs, nuts or dressing alongside the vegetables?

These are only a few examples showing that introduction inevitably leads to questions and disputes about scope. The Netherlands' freedom is also not unlimited: under EU law, similar products must be treated alike.

Is the measure even desirable?

Whether introduction is desirable seems to be a settled question. It would be good, though, if government and parliament did not pass over it. What are we actually talking about?

Suppose a household spends € 40 a week on fruit and vegetables. That currently carries € 3.30 in VAT (9/109 × € 40). A reduction to 0% therefore leaves this consumer with at most € 3.30 more to spend each week. If the zero rate is intended to support the spending power of households on modest incomes, it hardly moves the needle.

A reduction also only lowers prices to the extent the business passes it on. Where it does not, or only partly, the reduction simply increases the margin and amounts to a subsidy for the business. Research shows the price effect is often limited and sometimes nil. A 2015 IMF working paper cautiously concludes that on average around 30% of the benefit reaches the consumer. Of that € 3.30, only a fraction is likely to remain.

Nor is that all. Suppose prices do fall. Will consumers spend the saving entirely on eating more healthily? No. According to the Dutch nutrition centre and Rabobank research, the price elasticity for fruit and vegetables is around 0.5: a 10% price fall increases demand by 5%. Even if the whole benefit reached the consumer, which is unlikely, at most half of it would go on buying more fruit and vegetables. In our example, about € 1.65.

The argument that low-income households benefit most is unconvincing too. If the reduction does lower prices, higher-income households gain the most, simply because they spend relatively more on fruit and vegetables.

Then there is the administrative burden on businesses, the implementation cost for the tax authorities, and the cost of scope disputes for the courts, the authorities and businesses alike.

Government and parliament would therefore be wise to reconsider this well-meant but poorly thought-through plan. Better to turn back halfway than to go the whole way down the wrong road.