Impact of permanent sales discounts on value added tax revenues: Case of basic food in the Czech Republic

Abstract

The study examines frequent price discounts in retail chains in the Czech Republic for a selected range of products (milk, eggs and poultry). Combined with sub-purchase or sub-cost prices, such frequent promotional activities might lead to a decrease in the tax base for VAT payments to the state budget and to a potential loss of VAT. The study introduces an original methodology for estimation of the potential loss of VAT for the state budget due to the use of sub-purchase and sub-cost prices within frequent price discounts (promotional sales). The proposed methodology is used to estimate the VAT loss for milk, eggs and poultry in the Czech Republic in different ways. Most of the results suggest that the loss of VAT revenue for the budget is dependent on the share of promotional sales in the total production of the goods in question. The presence of frequent price discounts might lead to a loss in VAT revenues of up to EUR 74 million in the case of milk, EUR 9.2 million in the case of eggs and EUR 4.6 million in the case of poultry. In comparison to the Czech Republic state budget surplus in 2018, these losses might have a potential to increase the budget surplus by up to 21.73%.