Cash is the biggest ally of shadow economy - These are tax measures which can return economy in legal flows

Total shadow economy level in the Republic of Serbia was estimated to 20,7% GDP in 2014. That level can be decreased through supporting electronic payment methods and increase in value of these transactions, it is the conclusion of the study which EY company (Ernst&Young) conducted in cooperation with MasterCard.

This study, apart from detailed analysis of the existing state, scope and shadow economy forms in the Republic of Serbia, including sectorial distribution, identifies and some regulatory measures and policies which can help in the fight against this sub-situation through electronic payment method.

Cash payment as a cure

In many countries where cash payment has still been the main payment method, shadow economy is one of the key problems. Findings of EY study show that cash payment is an important factor which contributes to expansion of shadow economy. The analysis also outlines that transfer from electronic payment methods would definitely be in the interest of the governments of the states which face this problem. Therefore, governments of states are trying to provide higher level of tax payment collection so that it would be efficiently carried out through promotion of electronic payment methods.

The Study shows high quality econometric estimation of shadow economy in the Republic of Serbia, including its total scopes and development in the past few years.

This is the first time shadow economy was analyzed in total with its active and passive aspects. Passive shadow economy are the situations where a consumer pays regular price but a seller does not register that transaction (e.g. he does not issue a bill for catering service) and thus makes profit, avoiding VAT payment to the state. For instance, when you come to a café, have a drink, pay the full price and you do not get a fiscal bill.

The situation is a bit different when it comes to active shadow economy where both parties which participate in transaction profit from its non-registration (e.g. a consumer is enabled to pay the lower price than usual for a construction service if he or she does not require a bill from a service provider). In these cases, cash cannot be considered to be a consequence but reason of illegal act. Consequently, contrary to passive economy, promotion of electronic payment methods may not have effect on active shadow economy since both buyer and seller continue with cash payments in order to profit from unauthorized transaction. Therefore, active shadow economy must be decreased through other instruments (e.g. labor inspection).

Apart from that, another important innovation with EY study is sectorial distribution of passive shadow economy. Food and beverage and tobacco sector accounted for the biggest portion of shadow economy in the Republic of Serbia (app. 43%).

According to the last study estimations, total level of shadow economy (value of unregistered transactions) in the Republic of Serbia exceeds 20% (20,7%) of GDP. Passive shadow economy reaches 15.6% GDP, which is RSD 127 billion of profit that the government lost due to non-taxationof profit generated by companies and non-collection of VAT.

What is solution?

In order to decrease these figures at least, EY is suggesting a set of policies and regulatory measures which should support governments of the states to decrease shadow economy levels.

- There is a wide spectrum of potentially relevant regulatory measures which could be considered in order to decrease passive shadow economy in the Republic of Serbia - says Ivan Rakic, a partner in the Tax Department of EY Serbia.

EY experts suggest:

1.If in a year, 80-90% turnover is without cash, an entrepreneur is free from tax on income from lump sum business. This is considered to be an incentive for SMEs, mainly for traders.

2. To enable funding of post terminal procurement. Namely, for ten years now, there is a legal commitment that post terminal should be on place but there are no sanctions if an entrepreneur does not have that device.

3. VAT return. EY sees this solution as an incentive for consumers. For instance, if you pay for plumber service for instance with a card and get a fiscal bill, the state could refund VAT to you.

4. VAT lottery is also suggested as an incentive for customers. Collection of fiscal bills and their sending in exchange for a reward produced excellent results in 2005. EY suggests this as a continuous activity.

(Ivan Rakic)

Apart from that, EY calculated that if all turnover over 500 dinars would be done through cards not in cash, the share of 9.5% shadow economy in GDP would disappear!

MasterCard communicates that card company in the past successfully helped governments of the states in their fight against shadow economy through the provision of necessary expertise.

All proposals of the EY will also be presented to competent government institutions in December.

Predstavništvo Mastercard Europe Beograd

Ernst and Young

EY

shadow economy

Artur Turemka

tax collection

cash payment

non cash payment

value added tax

lump sum income tax

VAT return

VAT lottery