Croatia: Fiscalization to control gray economy

Fiscalization in Croatia  Photo: Dusko Jaromaz/Pixsell

Fiscalization in Croatia Photo: Dusko Jaramaz/Pixsell

The concept and the practice of fiscalization in controlling the gray economy, stamping out or minimizing avoidance of business sales tax, goods and services tax or VAT or whatever it’s called depending on where you live, has as of 1st January 2013 become a reality in Croatia. Fiscalization generally pursues as efficient as possible control over business operations and their turnover.

If any country needs such a system of control then the countries still struggling out of Communism would surely be at the top of the list.

One may ask: but there was enough control under Communism, why impose more? The answer to that question could include that fiscalization doesn’t fall under political controls aimed at benefiting the political elite and sustenance of totalitarianism where citizens’ livelihood depended not on their personal contribution to the nation but upon the personal will of the political elite. Hence, fiscalization can be seen as a process that has every chance of modifying business people’s behavior towards personal responsibility within the common good, i.e. the nation.

In 1789, in his letter to Jean-Baptiste Leroy, Benjamin Franklin (one of the founding fathers of the United States of America), said: “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes”. The latter sentence has not only become a famous quote in “Western” democracies but it’s implication that paying taxes is inevitable has somehow shaped the majority of individual citizen’s responsibility towards the common good, i.e. nation building. Under the thumb of Communism, and consequent widespread tax avoidance and corruption, Croatian people, regretfully, missed out on such social “pressures” to comply with tax laws and accept each individual’s responsibility towards the state.

Croatian government is currently enforcing its new Fiscal Law on cash-based businesses.

Under this law a fiscal device (computerised cash register) is placed into the system for monitoring tax pay or fiscal systems in the function of control over money traffic in accordance with law. Citizens will even be able to check with the tax office whether a receipt they’ve been given at a restaurant, say for the dinner they’ve consumed, has in fact reached the tax office electronic registry.

Fraud in terms of concealing sales from the tax office may seem insignificant if we think in terms of individual consumer, but it adds up to serious levels on the overall scale. Estimated losses for government tax revenue can add up to billions – and these billions are the billions necessary to secure funds for decent living standards and improvements as well as maintenance of public facilities.
So, fiscalization in the sense of current implementation in Croatia with cash dependent economy represents utilisation of tax collection system with help of various secure devices designed to safe keep amounts which taxpayer has collected from buyers, and produce report totaling sum of tax money needed to be paid into government’s budget. Undoubtedly, government revenue increase is set to increase via this system.

The Croatian Ministry of Finance has emphasized that it will ban business activities, stamp closed all premises of those businesses found not to comply with the new law, i.e. who are not issuing “fiscal receipts” for all sales. As life would have it, cafés, restaurants etc. are the first to comply. If, upon inspection, non-compliance is discovered and then rectified, then the business would be allowed to recommence with business.

About 400 fiscalization inspectors hit the streets of Croatia on January 8th and the plan is to inspect over 1,500 businesses by January 11.

A seemingly very costly, if not unaffordable, compliance check. Seemingly heavy handed flooding. Could be, but perhaps that is exactly what’s needed in the Croatian cash/gray economy which, to my view, has enjoyed a far too long a honeymoon period on issues of tax obligations.

On January 11th, Vecernji List reported that in the past five days, 418 fiscalization inspectors had completed 3,418 inspections and found 248 non-compliances. Hospitality businesses (restaurants, cafés…) found to be non-compliant were given 48 hours to correct this and achieve compliance.

This result is a good sign of better things to come for Croatian economy and business behavior.

Almost universal experience tells us that certain individuals will always invent solutions or ways to elude their fiscal duties, to avoid paying taxes or declare minimised income or profit in order to minimise their tax bill. Some humans are just like that and always will be. Tax evasion occurs in particular where there are faults and loopholes in legislation and enforcement methods are deficient.  By the sound of things the latter is not a problem in Croatia these days: there’s almost an army of fiscalization inspectors on the streets. There’s even a Facebook page on the issue of fiscalization in Croatia; the potency of social media is bound to make its mark as well.

All said, near future will tell how efficient Croatia’s fiscalization system is. Certainly one cannot bypass the fact that it has imposed new burdens on those taxpayers who have been responsible with their tax obligations; they will need to invest in new computer technology and software, and some may struggle to find the initial cash flow necessary in order to meet compliance with new Fiscal law. Perhaps the Ministry of finance might look into assisting some businesses in this area at this early stage of legislation enforcement? Fiscalization will also increase operating costs of businesses, and indeed, some business owners are talking of job losses etc. because of fiscalization.
Fiscalization teething problems may be many, indeed, but oh what a great opportunity for a positive partnership between business, individuals and government.
To quote Jeff Heinrich of Montreal’s Gazette, on the issue of the success of similar fiscalization as in Croatia: “…there’s no question: Tax collectors certainly have an easier time doing their job now than they did before. And that’s good for everyone: taxpayers, businesses, the government, everyone.
We have to get the message out that tax evasion is harmful to the collectivity. Everybody, not just us, has to do their share to make sure there’s less of it.”

Couldn’t agree more! Ina Vukic, Prof. (Zgb); B.A., M.A.Ps. (Syd)

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