* France to cut sales tax on dining out from July 1
* Decision to cost state 3 billion euros a year
* Restaurants, cafes to hire 40,000 workers in two years
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By Crispian Balmer
PARIS, April 28 (Reuters) - Sales tax on restaurants and cafes in France will fall to 5.5 percent from 19.6 percent on July 1, the government said on Tuesday, after the industry promised to pass on the price cuts and go on a hiring spree.
Successive French governments have campaigned for seven years to lower value-added tax (VAT) on dining out, arguing that the existing rate was too punitive in a country that prides itself on its culinary heritage.
President Nicolas Sarkozy finally got the green light from Brussels last month to slash VAT as part of a broader stimulus package to tackle the global economic crisis.
"The reduction in VAT is going to let France ... conserve and improve its culinary reputation," Economy Minister Christine Lagarde told reporters.
She added that the cut would cost the state 3 billion euros ($3.91 billion) a year in lost revenues, but that this would be partially offset by the expected increase in restaurant business and the promised boost to employment.
To secure the low VAT rate, trade bodies said their members would hire 40,000 workers, including 20,000 young apprentices, over the next two years and reduce the price of many items by 11.8 percent, including a cup of coffee.
The reduction will not apply to alcohol sales in order not to encourage heavy drinking, the government said.
A TOURIST DRAW
The French media has questioned whether restaurants will actually pass on the price cut to customers, but the government is hoping that competition will force owners to comply.
The economy ministry says there are 180,000 restaurants and cafes in France and 80,000 canteens, employing some 680,000 people, making it one of the biggest employers in the country.
The VAT cut is timed to coincide with the start of the high summer season in the world's top tourist destination, where the promise of good food and drink is often part of the allure.
"Our first cause for satisfaction is the start date. It's the best of dates. The season starts on July 1," said Didier Chenet, head of France's hotel, restaurant and cafe union.
"Clients will now be able to enjoy a full meal with a 5.5 percent VAT rate. That will be marked on the menus," he said.
Former French President Jacques Chirac made cutting VAT for restaurants an election campaign pledge in 2002 and although he won the vote he was unable to honour the promise because such moves had to be approved by all EU member states.
Neighbouring Germany in particular refused to endorse the move. It feared it would lose out in cross-border trade to French restaurants and was reluctant to match the proposed cuts because of the budget ramifications.
Last month's deal in Brussels allowed countries to lower VAT on a broad assortment of services, including restaurants, but not every country is expected to take advantage of the change. (Additional reporting by Veronique Tison; editing by Stephen Nisbet)