As of this year, Lithuania abolished the reduced 9 percent VAT rate for the catering sector, introduced to help businesses affected by the Covid-19 pandemic. The catering sector representatives say this will lead to higher prices.
The standard VAT rate of 21 percent has been reintroduced for the catering sector amid the economic slowdown, said Gediminas Balnis, CEO of Amber Food, one of the largest restaurant groups in Lithuania.
According to him, the increased VAT rate, as well as the rising minimum monthly wage, which accounts for the lion’s share of the costs, will inevitably lead to a rise in the prices at cafes and restaurants. Inflation and rent indexation will also play a role, he stressed.
“This is a Molotov cocktail because there are so many negative circumstances in one place. Restaurants and catering are not basic goods, so we are forced to increase prices,” Balnis said.
Prices in the restaurants operated by Amber Food have already risen by up to 8 percent, he noted. However, the increased prices do not compensate for the additional costs, according to the CEO of the restaurant group.
Meanwhile, prices at Caffeine will increase by 10 percent in 2024, said Lina Kaminskaitė, a marketing and communication manager at Retain Convenience Lithuania, which owns the coffee shop chain.
“This means that pricing has remained unchanged. We are entering into 2024 with a price change of around 10 percent. This is due to the abolition of the reduced VAT, rising wages, and the rising cost of raw materials,” she told LRT.lt.
Return to black market
The abolition of the VAT exemption will result in around 12 percent higher prices in the catering sector, estimates Evalda Šiškauskienė, the head of the Lithuanian Hotels and Restaurants Association (LVRA). The increase in the minimum wage could add another 10 percent, according to her.
“In real terms, the prices should rise by at least 22 percent, regardless of the energy costs. Of course, nobody wants to scare the consumers, so some will increase prices by 12 percent, others by 15 percent,” she said.
In her words, the reduced VAT rate also helped the catering sector to “become more transparent”. However, with the higher VAT rate reintroduced, some businesses may choose to return to the black market.
Šiškauskienė stressed that catering is one of the most labour-intensive sectors, with 40 percent of costs allocated to staff salaries: “Businesses are no longer able to pay salaries and starting to pay envelope wages again.”
She also predicted that more businesses might go bankrupt due to increased costs. In the last six months, there were 130 bankruptcies in Lithuania’s catering sector.
According to the head of the LVRA, chain restaurants make up 16 percent of Lithuania’s catering sector, luxury restaurants – 4 percent, while the remaining 80 percent includes food suppliers to schools and medical institutions, as well as small businesses, such as bakeries.
Gabrielius Grubinskas, the spokesperson for Vilnius City Municipality, noted that the municipal administration has assessed the abolition of the VAT exemption and decided to increase the amount of funds for the purchase of products for students’ free lunches.
“As of February 1, the rate of free lunches for preschool and primary school students will be 2.40 euros (previously 2.10 euros) and 2.60 euros (previously 2.30 euros) for students in grades 5-12,” he said.
The Kaunas City Municipality is also planning to increase funding for free school meals.
No right time
It is only natural that the representatives of the catering sector are dissatisfied with the abolition of the reduced VAT rate, said Tadas Povilauskas, an economist at SEB Bank.
According to him, passing the increased costs on to the consumers will not be possible immediately, and each café or restaurant will have to assess how much they can afford to increase the prices.
“It is clear that the impact on profits will be negative, at least for a few months,” Povilauskas said.
He stressed, however, that the funds collected from VAT go to the state budget and money is needed for public needs.
Asked about the timing of reintroducing the normal VAT rate, the economist said that there is never a right time for such a step. However, this year is more appropriate for the VAT increase because the businesses are no longer recovering from the pandemic and the energy price hikes, Povilauskas said.
The economist estimated that prices at cafes and restaurants in Lithuania would rise by 12-15 percent because of the higher VAT rate.
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