Recently, the secretariat of Hacienda (SHCP) in Mexico sent its 2022 miscellaneous fiscal budget to Congress, which includes reversal of the 16% VAT tax that the past administration levied on pet food in 2014.
According to the budget document, the federal government plans to standardize the 0% VAT tax rate to all food products, whether for human or animal consumption. The government states the current fiscal law does not distinguish between human consumption food and animal consumption food; thus, the current VAT tax on pet food is contradictory.
Regardless of the legal aspects, the current VAT tax on pet food in Mexico is an indirect tax transferred to and paid by the final consumer.
In January 2014, when the 16% VAT tax on pet food came into effect, pet food inflation soared by about the same rate. Yet, since February 2014, prices of pet food have stabilized and continued increasing at the usual rate.
Therefore, if Congress passes the new budget, it is expected that pet food prices will decrease starting in January 2022. However, it is uncertain if all local pet food producers and sellers will decrease prices by 16%, as there is no history or evidence of how VAT tax eliminations might play out. The 2014 VAT tax on pet food was the first.
The reversal of the 16% VAT tax on pet food should take just weeks to be approved. If it is,
this will be good news for the Mexican pet food industry, as it will help reduce the inflationary pressures the industry is experiencing.
In addition, as prices drop, consumers will likely increase their purchasing of pet food temporarily or may upgrade from inexpensive brands to premium ones. And, because a temporary price drop typically stimulates demand in the short term, volume growth prospects for the Mexican market will likely rise in 2022.
Iván Franco is the founder of Triplethree International and has collaborated on hundreds of research projects for several consumer goods industries. He was granted the Global Consultant of the Year award by Euromonitor International and authored the book 17 Market Strategies for Growth (in Spanish).
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