Germany’s Plan to raise VAT on restaurant food sparks concerns

The German government’s recent announcement to revert to a standard Value Added Tax (VAT) rate of 19 percent on food in restaurants and cafes, effective from January 1, 2024, has triggered concerns among consumer advocates and industry experts alike.

Impact of the pandemic

Originally, as a response to the severe impact of the pandemic, the government had reduced the VAT rate on food (excluding drinks) served in restaurants and cafes to 7 percent.

This measure aimed to support struggling businesses during enforced closures and subsequent economic instability. The extension of this reduction until the end of 2023 was driven by soaring inflation, particularly due to escalating energy costs.

However, as part of new fiscal policies aimed at curbing inflation, the government now plans to reverse this tax cut, a move anticipated to play a role in stabilizing inflation rates. Proponents argue that it’s a necessary step to regain control over inflationary pressures. Conversely, opponents fear this action could deter people from dining out, potentially leading to closures of numerous establishments.

Consequences

The inevitable consequence of this VAT adjustment is an anticipated rise in restaurant prices, directly impacting consumers already grappling with increased living expenses. This price surge might prompt many individuals to opt for home dining over restaurant visits due to financial constraints.

The German Hotel and Restaurant Association (DEHOGA) voiced deep concern, emphasizing that the reversion to a 19 percent VAT rate poses an existential threat to an industry that has faced severe challenges over the past three years.

Highlighting the significant closure of businesses within the industry—amounting to a 16.1 percent decline, with 36,000 closures during 2020 and 2021—DEHOGA underscored the dire consequences, emphasizing the potential loss of thousands of jobs.

Industry voices

Additionally, DEHOGA criticized the perceived favoritism shown towards food delivery apps such as Lieferando and Uber Eats, as these platforms continue to enjoy a 7 percent VAT rate on their services compared to the increased rate for restaurants.

Conversely, Friedrich Heinemann from the Leibniz Center for European Economic Research (ZEW) in Mannheim, offered an alternative perspective. Heinemann argued that the rationale for reducing VAT on food during the crisis no longer holds now that the pandemic is receding.

This move by the German government raises profound concerns within the hospitality sector and among consumers, reflecting the delicate balance between economic stability, consumer behavior, and the fate of numerous businesses in the wake of fiscal policy changes.

Consumer advocates have warned of a price shock on the horizon as the German government announced plans to scrap the reduced rate of VAT on food in restaurants and cafes as of January 1, 2024.