Shadow economy in the formal sector reduced, one in three companies still in the shadow zone
The scope of shadow economy has been reduced from 21.2% to 15.4% of GDP among registered businesses over the past five years, but one in three businesses still operate in the shadow zone, a number largely contributed by non-registered entities which account for more than 17% of the total number of businesses – these are the results shown by the analysis “Shadow economy in Serbia 2017”, performed by NALED with the support of German Development Cooperation.
- Improvement of inspection oversight aimed at detecting non-registered businesses needs to be set as the first priority of the new Action plan for the National Program for Countering Shadow Economy, along with more efficient processing of such conduct, given the study results showing that only 24% of businesses (one in four) believe that doing business in the shadow zone would be punished – said Goran Kovačević, Vice President of NALED Managing Board at the opening of the III national conference “Way Out of Shadow Economy” at the Palace of Serbia, which presented the new analysis, the first of its kind since 2013.
The analysis will act as a basis for further improvement of the National Program, and the data show that the most dominant form of shadow economy is employment without an agreement and payment of salaries in cash. Out of 100 dinars obtained in the shadow zone, 62 refers to unregistered salaries, and 38 dinars to non-registered trade of gods and services, i.e. unregistered profit. The good news is that compared to 2012, the number of businesses not registering their employees was cut by half, from 20.5% to 10.8%.
- The Government of Serbia has a systemic approach towards countering shadow economy and one of the priorities for 2018 will be the transformation of Tax Administration. Another important step is the improvement of inspection oversight efficiency, and the IT system e-Inspector shall network the first four inspections by June. It is important to note that incentive measures from the National program are equally important. We hope the effects of introduced tax exemption for start-ups will enable us to extend this measure to new categories – said the Prime Minister Ana Brnabić.
Registered businesses which partially engage in the shadow zone account for 16.9% of the total number of businesses and their number has significantly reduced compared to the previous analysis when their number was 28.4%. The reduction was contributed by the fact that more businesses moved from the shadow to the formal zone. Out of 10 businesses which worked in line with the regulations in 2012, eight continued to do so, while out of 10 businesses in the shadow zone, eight decided to move to the formal economy. The positive result was largely contributed by improved business conditions, macroeconomic stability, improved work of inspections and more efficient tax collection.
The analysis shows that entrepreneurs are more prone to shadow economy compared to businesses, where most risk is seen among businesses with no employees or which work with associated entities. Work in the shadow zone is mostly perceived as a “survival strategy” and the data show that the probability for businesses operating at a loss to engage in the shadow zone are twice as high compared to successful businesses.
- Continuous reform efforts are highly significant for the EU accession process, primarily in the field of rule of law, and particularly in countering corruption. This is closely related to the countering of shadow economy, stressed the German Ambassador Axel Dittmann, adding that, in his visit to Serbia, German Foreign Affairs Minister Sigmar Gabriel confirmed Serbia’s perspective for the European Union membership if the accession criteria are fulfilled.
Given that the improvement of businesses economic strength may also lead to reduced shadow economy, the analysis recommends further improvement of the macroeconomic and regulatory environment, focusing on the reduction of informal employment and improved efficiency of inspections by targeting high-risk businesses in control visits.
The policies for reducing shadow economy should focus on improving the chances of identifying and imposing penalties to businesses engaging in shadow economy, as well as more efficient enforcement of such penalties given that increased probability of sanctions reduces the shadow economy by 11%, while higher chances of penalties being paid result in up to 14% increase.
A major role is seen in the improvement of tax culture through media campaigns aimed at raising awareness among citizens and businesses on the adverse effects of shadow economy. The analysis also recommends enabling higher predictability of tax policies, to reduce the taxpayers’ resentment.
The analysis “Shadow economy in Serbia 2017” was developed within the project “Supporting the Government of Serbia in countering shadow economy”, implemented by NALED with the support of German development cooperation. The analysis was developed by professor Gorana Krstić, Faculty of Economy in Belgrade and Branko Radulović, professor at the Faculty of Law in Belgrade.