1 Introduction
1.1 Design principles of a best-practice VAT
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In principle, farmers, agro-processing firms and traders in food products should be taxed the same as other manufacturing and trading establishments if their sales exceed the registration threshold below which potentially taxable persons do not have to file returns and pay VAT. This means that their output should be subject to the standard rate, that they should be able to deduct the VAT on inputs from the VAT on output and that they should remit the net VAT to the government or receive a refund if the VAT on inputs exceeds the VAT on output.
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The neutrality criterion also implies that agricultural products entering intra-EU and international trade should be treated on a destination basis—that is, taxed in the country of consumption rather than the country of production. In other words, exports should leave a country free of VAT, while imports should be taxed on a par with domestically produced goods. In short, the VAT should not be used to protect domestic agriculture or to subsidize exports.6
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Farmers whose output (turnover) is less than the registration threshold do not have to register for the VAT, although they can elect to do so. Consequently, they cannot charge VAT to their customers, nor deduct the VAT charged by registered suppliers. For administrative (or political) reasons, the exemption from registration can be extended to the whole agricultural sector as is possible under the Common VAT Directive (2016) in the EU.
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Farmers incur costs in complying with the VAT by having to register for VAT or by electing to do so. These costs tend to be distributed regressively with respect to income: as a percentage of income (or turnover), on average, small farmers (with inadequate accounts) incur higher costs than large farmers (with proper books of account).7 Exempt farmers do not incur compliance costs but are faced with nondeductible VAT on inputs.
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If exempt farmers cannot or do not have to comply with the VAT, an effort should be made to eliminate the VAT on their inputs so that it does not have to be borne by them nor become an arbitrary element of tax in product prices. Taxing inputs of agricultural products without relief through the VAT mechanism means that these products are possibly discriminated against compared with other domestically produced goods and services, or against similar imported products which enter the country presumptively free of VAT on inputs. Arguably, relief is not necessarily called for if farm produce is sold at the farm gate or to exempt traders in local markets, because the full VAT (assuming this to be the standard rate, not some zero rate) would have been paid on foodstuffs sold through taxable trading channels.
1.2 Organization of the article
2 Agriculture in the European Union
Percent of total in EU or by country (unless otherwise indicated) | Highest/largest | Next highest/largest | |||
---|---|---|---|---|---|
Country | %/other | Country | %/other | ||
Agricultural indicators (EU-27)
| |||||
Agriculture in GDP (%) | 1.2 | Romania | 4.7 | Bulgaria | 4.2 |
Agriculture in employment (%) | 5.2 | Romania | 30.6 | Bulgaria | 18.9 |
Agro-food exports (% of total) | 6.8 | Denmark | 19.2 | Latvia | 18.9 |
Agro-food imports (% of total) | 5.7 | Cyprus | 16.7 | Ireland/Latvia | 14.3 |
Expenditures on food (% of total) | 16.5 | Estonia | 28.3 | Latvia | 27.3 |
Agricultural characteristics (EU-28)
| |||||
Farms | |||||
Number of holdings (000) | 10,841 | Romania | 3630 | Poland | 1429 |
\({>}0\) and \({<}2\) ha (% of total) | 43.4 | Malta | 81.2 | Cyprus | 74.4 |
\({>}0\) and \({<}5\) ha (% of total) | 64.7 | Malta | 93.1 | Romania | 90.4 |
\(\ge \)100 ha (% of total) | 3.1 | UK | 21.9 | Luxembourg | 21.6 |
Average area per holding (ha) | 16.1 | Czech Rep | 133.0 | UK | 92.3 |
Production | |||||
Output at producer prices (€ million) | 415,055 | France | 73,994 | Germany | 57,637 |
Cereals (000 tonnes) | 334,182 | France | 72,715 | Germany | 52,010 |
Livestock (000 units) | 130,319 | France | 21,871 | Germany | 18,407 |
Dairy cows (000 head) | 23,557 | Germany | 4296 | France | 3697 |
Cows’ milk (000 tonnes) | 159,641 | Germany | 32,381 | France | 25,780 |
Employment | |||||
Total regular workers (000) | 22,210 | Romania | 6578 | Poland | 3559 |
Annual work units (000) | 9509 | Poland | 1919 | Romania | 1553 |
Family labor force (%) | 76.5 | Poland | 93.8 | Slovenia | 93.7 |
Women (%) | 25.4 | Greece | 33.5 | Poland | 31.9 |
Factor income per AWU | 12,591 | Denmark | 52,737 | UK | 38,985 |
Intermediate inputs | |||||
Total as % of value of output | 60.7 | Slovenia | 78.8 | Ireland | 75.0 |
Seed, feed, vets (% of total) | 46.7 | Slovenia | 60.6 | Belgium | 60.4 |
Fertilizers, pesticides (% of total) | 12.3 | Lithuania | 19.1 | Latvia | 18.9 |
Energy (% of total) | 12.2 | Greece | 26.9 | Bulgaria | 22.6 |
Environment | |||||
Greenhouse gases (% of total) | 10.3 | Ireland | 30.8 | Lithuania | 23.6 |
Ammonia emissions (000 tonnes) | 3591 | France | 701 | Germany | 633 |
Forestry and fisheries
| |||||
Forests (000 ha) | 161,081 | Sweden | 28,073 | Finland | 22,218 |
Fishing fleet (000 tonnes) | 1646 | Spain | 358 | UK | 196 |
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Two-thirds of all farm holdings are less than 5 hectares in size. It would seem obvious to exempt these farms based on size, but 5 hectares is more than enough land on which to operate an intensive farm raising hogs or chickens or on which to place greenhouses to grow fruits and vegetables. Accordingly, a threshold by reference to turnover should probably be preferred, but a combination of size and turnover would also be possible.
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Sixty percent of farm output by value consists of intermediate inputs. Preferably, the VAT on these inputs should not cumulate throughout the production–distribution process if farmers are exempt, either generally or by virtue of the threshold. Cumulative effects are particularly objectionable if exempt farmers supply, say, feedstuffs to other exempt or taxable farmers, or export their output. Optional registration is possible, but would saddle farmers with onerous compliance costs.
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Similarly, large (exporting) farms should not be confronted with hidden VAT in the inputs bought from exempt farmers, but be able to deduct the VAT on inputs from their suppliers in full.
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Inputs, such as chemical fertilizers and pesticides, whose use is harmful to the environment, should be subject to an excise that internalizes the external cost (water contamination, human and animal poisoning-diseases) that can be attributed to their use.14 Obviously, this excise should not be rebated at the export stage. Also, the VAT on these products should not be considered a substitute for the externality-correcting excise that ought to be imposed. Principally, VAT should be imposed on the excise-inclusive price of the products.
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Income support measures under CAP represent a compensating instrument in the EU’s expenditure kit that can be used to mitigate the extra tax burden on small exempt farmers attributable to nondeductible input VAT or compliance costs.
3 Options for the VAT treatment of agriculture
3.1 Overview
1. |
Taxation regime Farmers are treated like other businesses subject to VAT—that is, output is taxed and the tax on inputs is deductible from the tax on output. Small farmers whose output falls below the threshold are exempted but can elect to be registered |
2. |
Exemption regime All or some categories of farmers are exempted from VAT regardless of turnover, but individual farmers can elect to be taxable |
3. |
Input VAT relief for exempt farmers under either regime
|
(a) Exemption of agricultural inputs | |
(b) Reduced or zero rate on agricultural inputs | |
(c) Flat-rate scheme | |
(i) farmers charge a presumptive tax on output at a rate that on average accounts for the VAT on their inputs; they keep the amount of the presumptive tax, while taxable purchasers of farm products deduct the amount of the tax from their VAT on output | |
(ii) equivalent in result, farmers do not charge tax on output, but purchasers of farm products are permitted a presumptive tax deduction, which on average accounts for the VAT paid on inputs by farmers; they pay the amount of the deduction to farmers | |
(d) Monetary compensation by the government of the VAT paid on agricultural inputs on the basis of individual refund claims or calculated as under the flat-rate scheme | |
4. |
Output VAT relief for farm products Farm products are exempted, zero rated or taxed at a lower-than-standard but positive rate at the retail level |
3.2 Review of alternatives
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Specified inputs sold to farmers are exempted. This form of relief tends to be ill designed since farmers would still be stuck with the input VAT of suppliers. Also, the relief is ill targeted if users other than farmers would benefit from the exemption or be burdened by the unrelieved VAT on inputs of the exempt products if they are not registered for VAT. This can be prevented by so-called end-use exemptions—that is, inputs would only be exempted if sold to farmers. However, end-use exemptions—redundant in the case of taxable farmers—are notoriously difficult to monitor.16
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Specified inputs, such as seed, feed, fertilizers, insecticides and perhaps other inputs, such as agricultural machinery, can be taxed at a reduced rate or be zero rated17 so that exempt farmers incur less or no VAT on their inputs of these goods and, hence, there is less or no hidden tax in the price of their output. The problem with this approach is that dual-use goods, such as building materials and means of transportation, which can be used for business as well as private purposes, in as well as outside the agricultural sector, should not be zero rated if revenue leakage is to be prevented. Accordingly, it is advisable to confine the reduced or zero rate to goods and services that can only be used for agricultural purposes.18
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Agricultural inputs are taxed, but farmers are compensated for the VAT included in the price of these inputs through a flat-rate scheme—that is, they charge a presumptive VAT on their sales to agro-processing firms (which would be able to take a deduction for this VAT), but would not have to register and file returns themselves and would be able to keep the VAT on sales as compensation for the VAT on purchases. Alternatively, but equivalently, farmers would not charge VAT on their sales but agro-processing firms would still be able to credit the presumptive VAT on farmers’ inputs and presumably pass the benefit back to farmers. Importantly, the flat rate should approximate the average tax on inputs. Flat-rate schemes are a unique European phenomenon.19
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The VAT on specified inputs, collected from suppliers by the government, can be paid out to farmers proportionate to their purchases of these inputs. Farmers would either have to file refund claims for the input VAT or the average payouts would be calculated in the same way as the rate under the flat-rate scheme. This form of input VAT relief is not found in many countries.
4 Taxation regime
Country | Standard rate\(^\mathrm{a}\)
| Reduced rate(s) on agricultural inputs | Reduced rate(s) on food stuffs | General threshold | ||||
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Fertilizers/pesticides | Other products | General | Special | National currency | EURO (PPP)\(^\mathrm{b}\)
| |||
European Union
| ||||||||
1. Standard rate on agricultural inputs | ||||||||
Bulgaria | 20 | – | – | – | – | BGN | 50,000 | 25,565 |
Croatia | 25 | – | – | – | 5: bread, milk, infant formula13: fats, oil, white sugar, food for children, restaurants | HRK | 230,000 | 30,523 |
Denmark | 25 | – | – | – | – | DKK | 50,000 | 6707 |
Estonia | 20 | – | – | – | – | EURO | 16,000 | 16,000 |
Slovakia | 20 | – | – | – | 10: certain food | EURO | 49,790 | 49,790 |
Sweden | 25 | – | – | 12 | – | SEK | None | – |
2. Reduced rate(s) on agricultural inputs | ||||||||
Czech Rep | 21 | – | 15: various | 15 | 10: child nutrition | CZK | 1,000,000 | 36,977 |
Finland | 24 | – | 14: feed | 14 | – | EURO | 10,000 | 10,000 |
Malta | 18 | – | 0: seed, live animals | 0 | 5: confectionery; 18: restaurants | EURO | 35,000 | 35,000 |
Romania | 20 | 9 | 9: seed, services | 6 | 9 | RON | 220,000 | 49,133 |
Other countries
| ||||||||
1. Standard rate on agricultural inputs | ||||||||
Australia | 10 | – | – | 0 | – | AUD | 75,000 | 52,650 |
Chile | 19 | – | – | – | – | CLP | None | – |
Iceland | 24 | – | – | 11 | – | ISK | 1,000,000 | 8020 |
Israel | 17 | – | – | – | 0: fruits&vegetables | ILS | 99,006 | 18,970 |
Japan | 8 | – | – | – | – | JPY | 10,000,000 | 87,930 |
New Zealand | 15 | – | – | – | – | NZD | 60,000 | 39,420 |
Norway | 25 | – | – | 15 | 25: restaurants | NOK | 50,000 | 6680 |
2. Reduced rate(s) on agricultural inputs | ||||||||
Canada (federal) | 5 | 0 | – | 0 | – | CAD | 30,000 | 20,710 |
Korea | 10 | – / 0 | 0: machinery, mineral oil, livestock | 0 | – | KRW | 24,000,000 | 19,480 |
Mexico | 16 | – | 0: animals, machinery&equipment, services | 0 | 16: processed food, restaurants, caviar, smoked salmon, pet food | MXN | None | – |
Switzerland | 8 | 2.5 | 2.5: feed, seed, other | 2.5 | 3.8: restaurants | CHF | 100,000 | 92,375 |
Turkey | 18 | – | 1: products, seed, machinery&equipment | 8 | – | TRY | None | – |
Agricultural production activities
| |
1 | Crop production: |
general agriculture, including viticulture | |
growing of fruit (including olives) and of vegetables, flowers and ornamental plants, both in the open and under glass | |
production of mushrooms, spices, seeds and propagating materials | |
running of nurseries | |
2 | Stock farming together with cultivation: |
general stock farming | |
poultry farming | |
rabbit farming | |
beekeeping | |
silkworm farming | |
snail farming | |
3 | Forestry |
4 | Fisheries: |
freshwater fishing | |
fish farming | |
breeding of mussels, oysters and other mollusks and crustaceans | |
frog farming | |
Agricultural services
| |
1 | Field work, reaping and mowing, threshing, baling, collecting, harvesting, sowing and planting |
2 | Packing and preparation for market, such as drying, cleaning, grinding, disinfecting and ensilage of agricultural products |
3 | Storage of agricultural products |
4 | Stock minding, rearing and fattening |
5 | Hiring out, for agricultural purposes, of equipment normally used in agricultural, forestry or fisheries undertakings |
6 | Technical assistance |
7 | Destruction of weeds and pests, dusting and spraying of crops and land |
8 | Operation of irrigation and drainage equipment |
9 | Lopping, tree felling and other forestry services |
5 Exemption regime or flat-rate scheme
5.1 Details of the flat-rate scheme
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The scheme applies to the activities of an ‘agricultural, forestry or fisheries undertaking’ as defined in Annex VII of the Directive and to ‘agricultural services’ as defined in Annex VIII (Box 2); they connote a wide definition of agriculture, forestry and fishing. Also included are processing activities of products deriving essentially from the farmer’s own production.
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The compensation for exempt farmers of the VAT on their inputs is provided in the form of a fixed percentage of the farmers’ output net of VAT, differentiated, if desired, by the kind of activity, be it agriculture, forestry or fisheries.
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In practice, farmers who want to join the scheme must notify the VAT authorities. Alternatively, the purchaser of the farm produce should do so.
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The flat-rate compensation percentage is calculated on the basis of national accounts statistics for the agricultural sector of the preceding three years, derived from sectoral input–output tables showing, inter alia, the inputs that have been subject to VAT.
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The flat-rate addition is not VAT but acts as compensation for losing input VAT on purchases. It is not intended as reimbursement for all the VAT incurred on purchases and cannot provide greater relief for farmers than the VAT charged on their inputs.
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The flat-rate addition is added to sales by exempt farmers (or to purchases by the processor), except in the case of the sales of machinery and land and the repair and maintenance of farm buildings. The flat rate cannot be charged on sales to people not registered for VAT or on sales to other flat-rate farmers.
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Flat-rate farmers must issue invoices, so taxable purchasers of farm produce can take a deduction for the amount of the flat rate. Alternatively, purchasers of the products of flat-rate farmers should issue invoices to flat-rate farmers, which the latter should keep as proof for tax audit purposes.
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The compensation can be provided in the form of a refund by the government to farmers of their input VAT or in the form of a payment from purchasers of their output to whom farmers would have charged the flat rate on their output.
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Exempt farmers have the option of VAT registration and payment, but then they are not entitled to the benefits of the flat-rate scheme.
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Flat-rate farmers who export their products are entitled to a refund of the flat-rate compensation amount. Similarly, importers from EU countries with flat-rate schemes can apply for a refund of the compensation amount from the exporting Member State.
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The flat-rate percentages calculated by the Member States have to be notified to the European Commission, which monitors the percentages to see whether the scheme is used to provide hidden subsidies to agriculture, which are not allowed.
Clearly, in view of the lawmaker’s earlier preference for flat-rate treatment, the Court cannot recommend an alternative scheme that would go even further in reconciling simplification and neutrality. So, it has to run with the hare and hunt with the hounds.23It is true that the result of paying simple compensation which is entirely flat-rate does not, by definition, ensure the complete neutrality of VAT. It does however achieve the highest neutrality possible taking into account the need to reconcile that payment and the objective of compensation with the objective of simplification of the rules to which flat-rate farmers are subject, which is also one of the objectives of the flat-rate scheme for farmers ...
5.2 Practical application
Member State | Standard rate\(^\mathrm{a}\)
| Reduced rate(s) on agricultural inputs | Reduced rate(s) on foodstuffs | General threshold | |||||
---|---|---|---|---|---|---|---|---|---|
Fertilizers/pesticides | Other | Flat-rate compensation (* = some categories) | General | Special | National currency | EURO (PPP)\(^\mathrm{b}\)
| |||
1. Standard rate on agricultural inputs | |||||||||
Latvia | 21 | – | – | 14* | – | 12: infant food | EURO | 50,000 | 50,000 |
Lithuania | 21 | – | – | 6 (\({\le }\)7 hectares)* | – | – | EURO | 45,000 | 45,000 |
2. Reduced rate(s) on agricultural inputs | |||||||||
Austria | 20 | 13 / 20 | 10 / 13 | 13 (\({\le }\)€400,000 turnover) | 10 | 13: wine from farms | EURO | 30,000 | 30,000 |
Belgium | 21 | 12 / 21 | 12: tires, tubes, other | 2: wood (\(\le \)€750,000) 6: other (turnover)\(^*\)
| 6 | 12: margarine, restaurants | EURO | 25,000 | 25,000 |
Cyprus | 19 | 5 | 5: feed | 5 | 5 | 9: restaurants | EURO | 15,600 | 15,600 |
France | 20 | 10 / 20 | 10: feed, gardens | 5.59: milk, meat, poultry, eggs, oilseeds, protein crops 4.43: other products* | 5.5 | 10: restaurants | EURO | 32,900 | 32,900 |
Germany | 19 | 7 / 19 | 7: some | 5.5: forestry 10.7: agriculture* 19: alcoholic beverages | 7 | 19: crustaceans | EURO | 17,500 | 17,500 |
Greece | 24 | – | 13: seed, feed, live animals, other | 4–6 (\({\le }\)€15,000 turnover) | 13 | – | EURO | 10,000 | 10,000 |
Hungary | 27 | – | 5: animals | 7 and 12* | 27 | 5: livestock, meat, pig 18: dairy, cereal, flour, and starch products | HUF | 6,000,000 | 19,351 |
Ireland | 23 | 0 / 23 | 0: seed, feed 4.8: livestock 9: garden centers, nurseries 13.5: vets, poultry, ostriches | 6* | 0 | 4.8: livestock 9: restaurants | EURO | 75,000 | 75,000 |
Italy | 22 | 4 / 22 | 10: livestock, meat, fish | 2 to 12.3 (11 different rates) | 4 / 5 | 10: restaurants | EURO | 30,000 | 30,000 |
Luxembourg | 17 | 3 / 17 | 3: most inputs 6: flowers & plants | 4: forestry 12: crop & stock farming* | 3 | – | EURO | 25,000 | 25,000 |
Netherlands | 21 | – | 6: various | 5.4 | 6 | – | EURO | None | – |
Poland | 23 | 8 | 8: animals, feed, services | 7 | 5 | 8: restaurants, some fruits, nuts, vegetables and pastry | PLN | 150,000 | 34,969 |
Portugal | 23 | 6 / 13 | 6: various 13: machinery, fuel | 6 (if exempt small business) | 6 | 13: canned mollusks, restaurants | EURO | 10,000 | 10,000 |
Slovenia | 22 | 9.5 | 9.5: various | 8 | 9.5 | – | EURO | 50,000 | 50,000 |
Spain | 21 | 10 | 10: various | 10.5: livestock, fisheries 12: agriculture, forestry (\({\le }\)€250,000 turnover)* | 4: bread, flour, milks, cheese, eggs, fruit, vegetables, cereals 10: restaurants | EURO | None | – | |
UK | 20 | – | 0: seed, feed, live animals5: fuel | 4 (\({\le }\)GBP 250,000 turnover) | 0 | 20: confectionery, restaurants | GBP | 83,000 | 106,114 |
Country | Flat-rate percentage | Products |
---|---|---|
France | 5.59 | Milk, poultry and rabbits, eggs, meat and charcuterie animals, oilseeds, protein crops |
4.43 | Other products | |
Italy | 2 | Wood, natural cork |
4 | Frogs, fish, crustacean and shellfish, fresh milk for food consumption, packaged for retail and milk products, plants and parts of plants, vegetables and eatable plants, fruit, spices, cereals, algae, oil of olive, cider, wine, vinegar, raw tobacco and raw flax | |
7.3 | Horses, sheep, goat, certain other domestic animals such as rabbits and pigeons, bees and silkworms | |
7.5 | Poultry | |
7.65 | Live animals of bovine species | |
7.95 | Live animals of pork species | |
8.3 | Certain types of meat | |
8.5 | Certain types of meat and fat | |
8.8 | Eggs, honey, wax, fur | |
10 | Fresh milk not treated for retail sale | |
12.3 | Wines of fresh grapes with some exclusions |
6 Evaluation of input VAT relief schemes
6.1 Problems with the flat-rate scheme
6.2 Would zero rating major inputs be a better alternative?
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In contrast to the flat-rate scheme, the zero rating of major inputs is relatively easy to administer. Generally, the zero-rated inputs would be sold by large manufacturing or trading units with good accounts and capable of accounting for VAT refund claims. Obviously, zero rating would not involve the farmers themselves in issuing invoices or keeping accounts. Also, farmers would not have to show a certificate to suppliers that they are genuine agriculturalists, which they have to do in Ireland, for instance, in order to be able to buy zero-rated inputs.
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Zero rating would involve a current benefit, whereas under the flat-rate scheme the time that elapses between the date of purchase of the inputs and the date the invoice is issued for the output, and compensation would become available, would imply that farmers would incur an interest cost on the VAT that is to be compensated. This cost can be high in times of high inflation.
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The same argument applies if processing firms pay farmers for their output and the VAT attributable thereto some time after farmers have invoiced the presumptive VAT on inputs. Again, the farmer would incur an onerous interest cost.
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In contrast to the flat-rate scheme, zero rating would also work if exempt livestock farmers buy, say, grain or corn from exempt crop farmers, since the latter would not have paid VAT on inputs either.
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The zero rate should be confined to agricultural inputs that have no alternative use outside the agricultural sector, not to, say, building materials and means of transportation. If desired, a VAT refund scheme could be applied to VAT incurred in relation to the construction, extension, alteration or reconstruction of farm buildings and structures and on land drainage and land reclamation. Obviously, expenditures on these items are less evenly distributed among farmers and hence less susceptible to a flat-rate scheme, while zero rating would be difficult to administer in view of the dual-use nature of these items.
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Further, the government should not justify the VAT as a proxy for the environmental tax that should be levied on chemical fertilizers and pesticides. Although the environmental harm of using these products should be accounted for in price, the appropriate instrument would be a specific excise rather than an ad valorem VAT. The specific excise can be directly linked to the environmental damage, while there is no relationship between the value of a product and the damage that it inflicts. This excise should apply to imported as well as domestically produced chemical fertilizers and pesticides.
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Lastly, there is no reason why very small farmers farming for their own consumption and for the local market should also benefit from the zero rate on agricultural inputs. Instead, the unrelieved VAT can be viewed as a tax on their own consumption and on the consumption of customers not paying taxes either. This can be achieved by stipulating that the zero rate applies only if the zero-rated inputs are sold by manufacturers or wholesalers directly to farmers in quantities of at least, say, 10 kilograms, as is the case in Ireland. But this means that farmers would have to show a certificate to suppliers stating that they are genuine farmers, a rather awkward administrative complication.