Reform of tax system to boost production, employment

Belgrade, 22 April 2010 (Serbia Today) - Minister of Finance Diana Dragutinovic said yesterday that the announced reform of Serbia’s tax system will boost production, employment and exports through a reduction in income taxes and contributions and an increase in excise. Speaking at the 11th session of the Assembly of the Serbian Chamber of Commerce, dealing with basic elements of the tax reform, Dragutinovic said that the excise on cigarettes and alcohol should be increased. This would be done by establishing the excise on alcoholic drinks by the content of alcohol, and not per liter. There is room for increasing the excise on cigarettes after the state’s obligations to investors in the tobacco industry cease. She stressed that the tax reform must have no impact on revenues, meaning that along with reduction of income taxes and contributions, the state must find additional sources of income so that budgetary deficit does not grow. The Minister explained that the VAT rate in Serbia is perhaps the lowest in Europe because there are two rates, of 18 and eight percent. The share of goods that are taxed with the lower rate is 40%, which means that the real VAT rate is 14%. Dragutinovic stressed that the grey economy contributes to over 30% of GDP, just as in other eastern European countries. By simply transferring the grey economy into legal channels, which is what representatives from the economic sector propose, we would not be able to close the budgetary deficit in the event of income tax being lowered, the Minister said. She said that the grey economy is the largest sector when it comes to employment, but the smallest in the VAT system, where taxes are the hardest to evade. She also said that the tax reform should strive to reduce tax in sectors where evasion is the highest, and increase it in others where it is not that frequent. Dragutinovic explained that such a tax system would stimulate exports because it would reduce labor costs and increase the competitiveness of the Serbian economy, at the same time discouraging imports and in this way improving Serbia’s balance of payments. The Minister stressed that the tax reform could also help to shift from one economic growth model to another, adding however that this is also influenced by the competitiveness of the workforce, the reduction in administrative obstacles and an efficient judiciary. She said that the Ministry of Finance is also working on a reform of public expenses and before the end of the year it will adopt a law on fiscal responsibility to limit the state’s expenses.