New Value-Added Tax Generates Revenue for Serbia
The introduction of a value-added tax (VAT) is a prerequisite for EU accession and a logical successor to the sales tax that provided Serbia's single largest source of state budget revenues
(around 40%). Roughly 200 countries worldwide have opted for value-added taxes, due to the system's neutrality, ability to generate a regular flow of revenue, and self-policing mechanism. Introduction of VAT does more to improve government revenues and shrink gray market activity
than any other single initiative.
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| USAID-sponsored public education campaign designed to prepare Serbians for VAT implementation |
On January 1, 2005 the Serbian government joined this effective international practice in the successful implementation of its own VAT, with critical support from USAID's Fiscal Reform Project. The effort has been closely coordinated with EU donors to synchronize activities and avoid duplication of support.
The VAT replaced the 20 percent sales tax on goods and services with a general 18 percent rate and an 8 percent rate for basic provisions, medicines, textbooks, and newspapers. Every entity that posted over 25,000 in turnover in 2004, or expects to post as much over
2005, is subject to the VAT.
In Serbia, an estimated 41% of the employable population has their primary or secondary job in the gray economy. Close to 40% of the economy in the urban areas is estimated to be in the informal sector, while over 60% of rural economic activities are undertaken in the informal sector. VAT pushes more economic activity into the formal sector where it can be taxed. The
tax forces every link in the transaction chain to pay its due, as conducting business with tax evaders incurs losses. The VAT will also test the liquidity of companies, as tax obligations will now be charged far more quickly than before.
In the period leading up to introduction of the VAT, the USAID Tax Reform Team established a fully operational communications and media team to help with public, taxpayer, and staff education. Various leaflets, posters, and technical brochures, as well as a media campaign, addressed different aspects of implementation, such as the effect on prices and the system's technical details. Support from the USAID/Fiscal Reform Project also helped ensure the timely completion of VAT registration, return filing, and payment procedures.
The Ministry of Finance expects the higher revenue collection rate under VAT to allow it to reduce the overall tax burden. The Ministry has already started making targeted tax cuts intended to stimulate saving, investment, and employment in anticipation of higher revenues from VAT in 2005. The Ministry particularly seeks to continue to target employer taxes on labor that discourage official hiring of new workers in order to address Serbia's high unemployment
rate. Implementation of VAT will continue to initiate many important efforts leading to the country's economic recovery, with ongoing support from USAID and the U.S. Treasury.
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