The reduced VAT rate for fertilisers and pesticides aims to support farmers and increase the productivity and profitability of farms. The reduced VAT rate is 5% instead of the usual 19%. The VAT legislation in Cyprus was introduced in 1992, but the current standard and reduced rate were established in 2002. Similar subsidies exist in Austria, Belgium, Bulgaria, Croatia, France, Ireland, Italy, Poland, Portugal, Romania and Spain.
The budget impact of the subsidy is EUR 5.2 million. If the subsidy were abolished, the price of fertilisers and pesticides would increase by 13%, causing a reduction in demand by 4.2%.
The subsidy also causes environmental impacts because lower prices of plant protection products incentivise their use and increase agricultural production, outputs and revenues. Impacts include increased levels of chemicals in agricultural runoff, contamination of water bodies and groundwater sources, soil degradation and acidification, eutrophication, resource use, higher emissions and pollution, biodiversity loss and land use. The abolishment of the subsidy in Cyprus would reduce the use of fertilisers by 700 tonnes. It would also reduce emissions of nitrogen oxides by 9.2 tonnes and ammonia emissions by 14.6 tonnes.
There are no foreseen reforms for the subsidy in Cyprus. These types of subsidies are considered essential due to increasing concerns regarding food security and rising energy prices. Reform could also impact competitiveness and distribution as smaller farms may not be able to afford fertilisers and pesticides. Successful reform would need to address environmental concerns while balancing substantial social impacts. There are several options to reform, such as phasing out the subsidy, keeping reduced VAT rate but reducing the environmental impact of plant protection products by opting for organic or less harmful options, supporting efficiency or providing a lump sum to compensate farmers.
More information on the reduced VAT rate for fertilisers and pesticides and other candidates for reform in Cyprus and other Member States can be found in the country case studies and factsheets compilation.