Reform of personal income tax and the situation of entrepreneurs
The Tax Council of the Republic of Serbia published on September 29, 2022 the “Proposal for social and tax policy measures to reduce inequalities and poverty risks in the Republic of Serbia”. One of the proposed tax policy measures to reduce inequality is to double the limit on the amount of non-taxable salary, from RSD 19,300 to RSD 40,000 and to introduce a non-taxable census of RSD 20,000 per month, to grant to each member of the household – dependent . In order to maintain the current level of budgetary funds, if this proposal for personal income tax reform is adopted, that is, in order to avoid a decrease in budgetary funds due to the reform, it is necessary to increase the wage tax rate from 10% to 15%. % in parallel with the increase in non-taxable census and the introduction of non-taxable census for dependent household members.
The proposed measures correspond to the analysis published by the Fiscal Council on July 1, 2021 under the title “Two decades of personal income tax: possibilities and need for a reform of the system”. In this analysis, the Conseil Fiscal pointed to a legitimate remark concerning the unequal tax treatment of the different types of commitment (employment relationship, commitment under a service contract or a temporary activity contract and occasional, and others).
On the other hand, the analysis from the year 2021 hardly addresses the question of flat-rate taxation, since it only addresses it with a single paragraph where it is said that the option of flat-rate taxation is too broad, and that it does not correspond to the principle of good commercial practice. The opinion of the Tax Council is that the principle of tax fairness may be undermined by such a policy, both observed in the relations between citizens who pay regular taxes and contributions, and in the relations between lump-sum taxpayers who accrue significantly different levels of income.
In the analysis of the year 2021, the Fiscal Council points out that IMF experts have proposed, as one of the possibilities for improving fairness in this area, that the ceiling of the flat tax be reduced from six to two million dinars of annual turnover. . In addition, and in order to avoid a sudden change of conditions for a large number of taxpayers who are currently in the flat tax rate system, the proposal is to introduce a “semi-flat rate tax system” for taxpayers whose annual turnover is between two and six years. million dinars. This new tax regime would represent a kind of compromise between the current system of flat-rate taxation and normal taxation, under which taxpayers would be obliged to keep simplified versions of business documents and tax would be calculated on the basis of rules simplified (for example, as a percentage of turnover).
Even if there are no significant general remarks to the assertion that the possibilities of flat-rate taxation are too wide, the most important problem with flat-rate taxation is that the criterion base, i.e. the sole criterion for flat-rate taxation, is the taxpayer’s income, i.e. the turnover.
The Fiscal Council and the IMF fail to identify the fundamental problem, i.e. why entrepreneurs gravitate towards flat taxation, whenever possible. The fundamental reason why entrepreneurs opt for flat-rate taxation is not related to the amount of their income, but lies in the way of dealing with the expenses of entrepreneurs who are not subject to the flat-rate tax system. Namely, the income accrued by entrepreneurs through their business activity is used for two purposes: to cover business expenses, but also to cover personal (living) expenses, unlike legal persons – companies that use accrued income to cover business expenses. and profit making. However, the rules for accounting for expenses are the same for entrepreneurs and for businesses.
Therefore, the fundamental problem that leads to such a wide application of flat tax should not be sought in the flat tax system, but in the tax treatment of entrepreneurs who do not use the flat tax system, i.e. in the manner and extent of their expenses which may be recognized for the purpose of determining the tax base in cases where taxes are paid on the basis of actual (and not lump sum) income . That is, only expenses accrued to contractors are accrued to such contractors. Such a treatment of contractors’ expenses is not justified. In the same way that the Conseil Fiscal recalls and proposes that it is not justified to impose a different tax treatment of the income of persons engaged by the service contract, or by another form of engagement, from that of employees ( in employment relationship), bearing in mind the similar nature of these commitments from the point of view of the person engaged, we can point out that it is not justified to treat the expenses of entrepreneurs – natural persons and companies similarly, given the different nature of these expenses from the perspective of the income recipient.
If this question is well thought out, it does not seem logical that the flat tax system should be based on a determined flat income for the entrepreneur – even if the income of each entrepreneur is known and indisputable, while the expenses that the entrepreneurs bear and who can be accounted for (in terms of their actual expenses related to both professional activities and living expenses) are not known, i.e. no one takes them into consideration.
In other words, if the situation of entrepreneurs – who are natural persons, on the one hand, and who carry out commercial activities, on the other hand – were recognized, and if specific rules for accounting for expenses (which would include living expenses) of entrepreneurs would be introduced, many entrepreneurs would abandon the flat tax system themselves. For example, if we consider that an average consumption basket amounts to just over RSD 86,000, according to the latest available data from July 2021, the mere recognition of this amount as an expense would amount to a little more than RSD 1,000,000 annually. When this amount is applied to the actual income of each entrepreneur, entrepreneurs who accumulate higher incomes would pay more taxes than those who accumulate lower incomes, while the tax relief for each of them would be obvious, thus the entrepreneurs would be motivated to get out of the flat tax system.
In summary, bearing in mind that the income of entrepreneurs – natural persons, represents in essence income from which entrepreneurs cover their professional expenses, as well as their living expenses, including the possible expenses of their dependents – household members, it is necessary to consider these two types of expenses when determining which expenses should be counted for tax purposes.
In this way, the proposal of the Tax Council to introduce reliefs (for natural persons) through additional non-taxable amounts for dependents – household members, could also be applied to entrepreneurs (through amounts additional recognized expenditure), which would mean that this applies equally to all natural persons, so that the tax discrimination of entrepreneurs, indisputably present in the current principles of tax policy, could be avoided. The costs of women entrepreneurs who decide to become mothers and who have costs related to childbirth and the resulting costs for these women, in particular the year in which the childbirth takes place, could also be treated in a special way. In the current atmosphere of a noticeable tendency to encourage awareness of the position of entrepreneurs and the current policy of encouraging entrepreneurship (especially with regard to computer services provided by resident natural persons to foreign customers , which, at the same time, lowers the unemployment rate), such a measure of budgetary and fiscal policy would be the first step in this direction.