Estonia's VAT rate was raised to 24 percent on July 1 and the measure is expected to generate €108 million for the state budget. It is not known how much will come from sales of foodstuffs, as the ministry does not keep separate figures.

Estonia is one of the only countries in Europe not to apply a lower rate of VAT on food.

A petition launched at the end of June calling for a 10 percent VAT rate on food had gathered nearly 90,000 signatures by Tuesday morning. So far, the government, led by Prime Minister Kristen Michal (Reform), has all but dismissed the proposal.

If the VAT on food were reduced to the European average of approximately 13 percent it would generate around €290 million in VAT revenue next year. This is €245 million less than expected with a 24 percent tax rate.

"The cost of implementing a reduced rate could be lower if it were applied only to specific product groups, as is done in Latvia. There, the reduced rate applies to fresh fruits and vegetables listed on a specific list, but does not extend to dried, salted, or frozen products, nor to exotic items," explained Anna-Liisa Villmann, an adviser at the Ministry of Finance's communications department.

She added that, based on price comparisons, in reality, there is no price difference between Latvia and Estonia.

Villmann said it would not be possible to reduce the VAT on food to 12 percent in Estonia, because European Union legislation allows for only two reduced VAT rates, and Estonia already applies 13 and 9 percent rates.

The ministry does not believe lowering the VAT level to 13 percent on food would be an effective or appropriate measure, as it would increase the forecast budget deficit in the coming years.

Villmann said implementing a VAT exemption requires defining the concept and criteria of "basic foodstuffs." This helps avoid disputes over whether a specific product should be taxed at the standard or reduced rate.

"For example, how high must the grain content in a product be for it to qualify for the reduced rate? Are confectionery items included? Or is a high-sugar dairy product still considered a basic foodstuff eligible for the reduced rate, and so on? From an administrative perspective, it is a complex and costly proposal," she said.

Prices may not drop at all

According to the VAT Act, foodstuffs include both unprocessed and processed foods such as milk, meat, vegetables, bread and grains, beverages (excluding alcohol), and essential goods.

"Without a more thorough study, we cannot say which products would become cheaper and by how much, or for how long. But there is sufficient empirical evidence to say that the VAT reduction does not fully reach consumers," Villmann said.

For certain product groups or over a longer period, prices may not drop at all, she said, arguing food prices are shaped less by VAT and more by other factors such as raw material costs, rising labor expenses, or commercial markups, which producers cannot control.

The Ministry of Finance finds that although reduced rates may provide short-term downward pressure on prices and help certain target groups, their long-term and systemic effectiveness is limited.

In the interest of a simple and efficient tax system, the ministry recommends considering alternative approaches, such as direct support for low-income consumers.

"Profit increases do affect the competitiveness of merchants and producers, but reducing the VAT rate is not an effective measure for supporting lower-income groups," Villmann added.

She noted that the Organisation for Economic Co-operation and Development (OECD) considers the essential elements of an effective VAT system to be a broad tax base and a single rate with few or no exceptions, making VAT a simple and low-cost source of tax revenue.

According to Villmann, the International Monetary Fund (IMF), which recently visited Estonia, also emphasized in its country-specific recommendations that Estonia's VAT system is efficient and that the country should resist pressure to introduce lower rates for certain goods.

Based on GDP statistics, an estimated half a billion euros in VAT was collected from foodstuffs and food products last year, making up 12 percent of total VAT revenue.

The IMF report also praised the car tax – which the government is now scrapping for families with children, suggested a property tax should be introduced, and that the Reform party's policy to remove the tax hump in 206 should be reassessed. It also called for an overhaul of the tax system.

While the government is sticking to its guns over VAT, Minister of Finance Jürgen Ligi (Reform) dropped a 2 percent tax on corporate profit from the defense tax, which was supposed to apply equally across society. The tax would have generated around €400 between 2026-2028.

Estonia has a flat rate of income tax of 24 percent, regardless of income.

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