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Tax office struggles to collect VAT

Recent reports from the Ministry of Finance indicate that the government's estimates for collecting this year's value-added tax (VAT) are off the mark. Combine that partly with unchecked tax evasion, and the prognosis is that the state budget may come up 11 billion Sk short. That would be a big turnaround from last year, when the government found itself sitting atop 5 billion Sk more in VAT revenue than planned. Riding on 1995's surprise success - mostly attributed to a new law mandating that all businesses use cash registers - the government budgeted itself for a 55.7 billion Sk in VAT take for 1996, an increase of 12.5 billion Sk.

Recent reports from the Ministry of Finance indicate that the government's estimates for collecting this year's value-added tax (VAT) are off the mark. Combine that partly with unchecked tax evasion, and the prognosis is that the state budget may come up 11 billion Sk short.

That would be a big turnaround from last year, when the government found itself sitting atop 5 billion Sk more in VAT revenue than planned. Riding on 1995's surprise success - mostly attributed to a new law mandating that all businesses use cash registers - the government budgeted itself for a 55.7 billion Sk in VAT take for 1996, an increase of 12.5 billion Sk.

The state coffers, however, are not filling up as predicted. By July last year, the government had already raked in over 56 percent of its total VAT revenue for the year; this year, they have only gathered 38 percent of what they hope to earn (see graph).

Part of the drop is easily explained. Slovakia dropped its VAT rate from 25 to 23 percent, which means an estimated loss of 5 billion Sk. But there is a deeper problem. The state is having a terrible time getting its hands on much of the money it is owed.

The problem extends to income taxes as well: the Central Tax Office in Banská Bystrica, responsible for tax collection, estimates that 15 percent of taxes owed this year have not been paid. Compounding the problem, tax experts estimate that the amount of taxes that will never be declared, much less paid, runs several times higher than that.

Even so, the numbers are striking. In the first three months of this year, the tax office carried out over 3,000 audits totalling 1.5 billion Sk. From this known figure, they have only managed to collect 0.4 billion Sk. Such figures help explain why the government, which had budgeted for income taxes of 23 billion Sk, only has 9 billion Sk in hand.

Evading the tax-man

Štefan Jagerský, the director of the Central Tax Administration, told the Slovak press agency TASR that a significant block of the missing taxes could be attributed to insolvent businesses. However, Bill Trautman, a tax advisor to the Ministry of Finance, said that he suspects there is a lot of evasion taking place. "The tax administration clearly needs to do a better job of collecting taxes," Trautman said "If they can do that, they can make the tax system more equal."

Under the current system, Trautman maintained, tax evasion drives up tax rates, leading to even more evasion. People who work as employees, he added, already carry a tax burden totalling up to 71 percent of their income. A report from the Ministry of Finance suggests that the Central Tax Office could toughen up on tax evaders in three ways: by forcing people to pay in cash, by auctioning off the goods of those who cannot pay, and by taking more directly out of workers' paychecks.

But that, said Trautman, throws collection further off balance, a move "detrimental to the development of a legitimate tax system and a free market economy."

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