Serbia Implements Value Added Tax

12/01/2005

Serbia's new Value Added Tax, introduced on 1 January, replaces the earlier sales tax on goods and services. It is expected to boost revenues, limit the grey economy, and improve competiveness.

By Dusan Kosanovic for Southeast European Times in Belgrade - 12/01/05

Serbian Finance Minister Mladjan Dinkic says the annual inflation rate will stay within the projected 9.1 per cent this year. [AFP]

The most important instrument of Serbia's tax reform, the Value Added Tax (VAT), came into effect on 1 January. The VAT replaces the 20 per cent sales tax on goods and services with a general 18 per cent rate and an 8 per cent rate for basic provisions, medicines, textbooks and newspapers. The tax is charged at every stage of production and sale.

"The taxpayer calculates and pays tax for the amount that has been added at that point of trade, which is why it is called value added tax and is more than just sales tax," says Natasa Kovacevic, deputy director of the Tax Directorate. "This is a new form of taxation, but not in the sense of a new, additional tax burden, but in terms of a form of taxation that replaces sales tax."

Every entity that posted over 25,000 euros in turnover in the past year, or expects to post as much over the next 12 months, is subject to the VAT. Authorities expect it to reduce the grey economy, and boost competitiveness and exports. The tax forces every link in the transaction chain to pay its due, as doing 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.

Authorities expect the change to result in 25m euros in revenues into the budget. Although some analysts say that figure is overly optimistic, the experience of neighbouring countries shows that VAT always brings in more than the old-style sales tax.

Retail prices of some products have risen since the introduction of VAT. For example, neither basic provisions nor computers were previously subject to sales tax, but now they are being taxed at the 8 per cent and 18 per cent rates, respectively. Massive spending took place at the end of 2004 as consumers rushed to make purchases before the new taxation system went into effect.

Despite anticipated price hikes, Serbian Tax Administration Director Vladimir Ilic does not expect the VAT to boost inflation. On the contrary, he says, most prices should fall, as the general tax rate has been lowered by 2 per cent. Serbian Finance Minister Mladjan Dinkic, meanwhile, has voiced confidence that the government will manage to keep the annual inflation rate within the projected 9.1 per cent in 2005.

According to Zoran Vasic of the Serbian Tax Directorate, some businesses are likely to announce price increases as a marketing strategy. "The fact is that vendors want to increase the amount of realisation for themselves. The psychological effect that is achieved … will increase that realisation. However, by February prices will return to the present levels," Vasic says.

Experts believe it could take as much as half a year for companies to adjust to VAT. Vladana Hamovic of the Market Research Institute says a real picture of the market can be expected in February and March. However, she cautions, market disruptions could last longer.

Regardless of the initial problems it could face, VAT is one of the prerequisites for launching Stabilisation and Association talks with the EU. VAT has been functional in most European countries for three decades now.