The French government has slashed value added tax (VAT) for the restaurant business from 19.6% to a significantly lower 5.5%, moving to satisfy a long-term demand from the industry. The tax applies to food but not to alcohol consumption.

This drop signals lower overall prices for consumers, since dining prices in France include VAT. Establishments are not legally bound to lower their prices as a result of the VAT drop; if they choose not to, they have the right to keep the same prices as before and pocket the difference.

Nonetheless, economic minister Christine Lagarde is confident that restaurants are likely to be motivated to implement a price drop in order to stay competitive. She said “The market will prove wrong” those who do not.

"More than 80 percent of businesses are going to toe the line," Didier Chenet, head of Synhorcat, a restaurant employers association, said Tuesday. French restaurateurs had been pushing for a VAT drop for years. France has campaigned for seven years to get the go-ahead from European Union partners to lower value-added tax for restaurants and cafes.

Big restaurant chains have already issued new menus with some prices discounted as much as 20%, and with as much as half or even the entire menu reflecting lower prices per item.

French President Nicolas Sarkozy has requested that restaurants drop their menu prices with the aim of allowing businesses to hire more employees and modernise their facilities.

Secretary of state for commerce Hervé Novelli celebrated the VAT drop overnight between Tuesday and Wednesday by dining at l’Alsace, a brasserie on Paris’ famed Champs-Elysées.

Novelli announced that he intended to evaluate the new system every six months with a committee that would include representatives of professional and consumer organisations, experts, and four members of parliament. The first such meeting, he said, is to take place on July 22.

The measure will cost the French state 2.38 billion euros a year but owners have undertaken to employ 40,000 more people.