Why BiH has only one VAT Rate for more than 10 Years and how justified it is?

It has been more than 10 years since the introduction of VAT, and our country is still one of the very few countries that apply a single rate of VAT, and which amounts to 17 %. Although this question is part of a political dialogue very often, no one has seriously started to change it, and which is often explained with the unwillingness of the Indirect Taxation Authority to monitor the application of multiple VAT rates and the increase of opportunities for avoiding taxes and other illegal activities.

“I think that behind all of this is the fact that the government agreed to the condition that the VAT must not be touched within the signed arrangement with the IMF, with which, besides monetary, we lost our fiscal independence as well. Current authorities will most probably announce the increase of VAT soon, which they will probably explain with their standard fairy tales about the growth and development that we are listening for 3 years,” said Aner Zuljevic, Ph.D. in Economics, a former lecturer at the Faculty of Economics in Mostar and SDP politician.

The Indirect Taxation Authority has all the necessary capacities to successfully introduce a differentiated VAT rate, and therefore, this cannot be the reason for the not-introduction, stated Admir Cavalic. The reason for not starting this process is primarily the result of fiscal projections that shows that the introduction of a differentiated VAT rate would not have a positive effect on the economy of BiH at the moment. On the contrary, there would be numerous negative effects, and that is the main reason why the Indirect Taxation Authority is avoiding that process. However, it should be added that differentiation would represent an additional effort for the ITA, especially when it comes to monitoring and sanctioning inevitable tax evasion.

Cavalic stated that numerous foreign and domestic studies have shown that there are a number of potentially negative effects of introducing a differentiated VAT rate. First of all, this affects administrative and tax complexity, which sends negative signals to foreign and domestic investments. Moreover, differentiation does not necessarily have a positive effect on prices due to non-elastic demand, as well as other influencing factors such as competitiveness, productivity, etc. Furthermore, differentiation can lead to the occurrence of the so-called gray zone, or tax evasion and other manipulations.

“At the time when this law was being prepared, and it was prepared in cooperation with tax experts from member states of the EU, it was estimated that the best option for BiH is a single rate and additionally, a lower rate. Therefore, the rate of 17 % was based on their analysis. At a recent conference that was held in Bucharest in June, and which was organized by the World Bank on the topic of VAT, it was recommended by all international financial institutions for countries that currently have more VAT rates to think about a transition to a single rate, because that model of VAT system proved to be the most efficient, according to their research and analysis,” said Ratko Kovacevic, Head of Communications and International Cooperation of ITA.

Therefore, BiH has a VAT system that is most effective according to international financial institutions. However, in case that BiH decides for the opposite direction, which includes a decrease of rates on some basic foods, this will mean an increase in the standard rate that will not be 17 % anymore, but higher.

Ratko Kovacevic stated that ITA is working on a whole range of projects, among other things, on the development of a completely new VAT law, and one of the things that will be proposed is an increase in registration thresholds in the VAT system from the current 50,000 BAM to 75 000 or even 100 000 BAM.

(Source: R. D./



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