OBSERVER: Bottled milk is not a luxury but bottled water is; plain biscuits are palatable but a hint of chocolate attracts fiscal wrath. Is it time to revisit VAT application? Ireland is out of step with the rest of Europe when it comes to its approach to VAT

After the increase at the last Budget to 21 per cent, the Republic's VAT rate is now the second highest in Europe. So much for a low-tax economy.

The only country with a higher VAT rate is Denmark, on 25 per cent, while the fortunate people in Luxembourg pay a lowly 3 per cent consumer tax.

What also singles out the Republic's approach to VAT and its uniform application to rich and poor alike is that, along with Britain, we are the only country that charges VAT on certain beverages - like bottled water, orange juice and soft drinks - but not on others, such as milk, tea and coffee.

Every other EU member-state charges VAT on these other beverages - some at the same rate, others at a reduced rate. The fact remains, that the Republic - and Britain - are out of step with the rest of Europe when it comes to their approach to VAT. When you also consider that the British VAT rate is "only" 17.5 per cent, the Republic then stands in blissful isolation with its punitive imposition of VAT on some products but not on other comparable goods.

When the VAT rate was increased in the last Budget to 21 per cent, it caught many commentators off guard. This was supposed to be the Government that supported a low-tax ethos to encourage economic activity in every area of the economy - and yet it imposed an increased VAT rate that has several negative implications - beyond the soft drinks industry that I am most familiar with.

Increasing the rate will put upward pressure on the inflation rate. This is a tax that is imposed without regard to ability to pay - so it hurts the lower paid relatively more than those on higher incomes - and it further undermines the move within the EU to harmonise tax rates. For all of these reasons, the move was a regressive one.

However, within the soft drinks industry the move is even more inexplicable.

For an industry that generates a spend of €500 million (£393.5 million) per year and VAT receipts of €80 million for the Exchequer, the imposition of this high rate on bottled waters, juices and soft drinks is totally unjustified.

Consider the anomaly whereby you can buy a pint of processed and packaged milk without VAT being added, but put natural mineral water into a bottle and you have to add 21 per cent to the sale price.

Another example of the craziness of the current system is where you buy a packet of tea - VAT free - but buy a can of iced tea and you have to pay the VAT premium. This apparent contradiction has echoes of a similar case a number of years ago in the Republic, where bread was not VAT-rated but biscuits were. The argument went along the lines that bread was a basic foodstuff but biscuits were not.

A compromise of sorts was reached whereby plain biscuits - now not such a luxury good apparently - were to be charged at a lower VAT rate, but chocolate biscuits were to retain their previous status and be charged the full rate.

It is time to recognise that the economy and society we live in has moved on from the days when bottled water was seen as a "luxury" good and soft drinks and juices were the exception, not the norm. There is no reason, other than outdated perceptions and tradition, to have bottled waters and soft drinks charged a VAT rate of 21 per cent.

The Beverage Council of Ireland would like to see these basic, home-produced commodities treated in the same way as the imported ranges of tea and coffee that sit next to each other on our supermarket shelves. In 2002 it is outrageous that consumers of bottled water or fruit juices be charged a premium over those that choose to drink teas and coffees.

There are so many reasons to eliminate VAT on soft drinks - impact on inflation, equity with other imported beverages, EU harmonisation, cheaper options for designated drivers and so on - but most obviously because its imposition is a throwback to a time, long since past, when having water out of a bottle rather than out of a tap was considered a luxury.

Take your pick of reasons Minister, but let's get rid of this punitive anomaly that affects us all.

• Bernard Murphy is executive director of the Beverage Council of Ireland - the representative group for the soft drinks industry in the Republic