Value-added Tax Evasion through Reduced Tax Rate: A Field Study from an Emerging Economy

Abstract

As vast majority of countries use standard and reduced value-added tax (VAT) rates, a taxpayer may be motivated to misuse the reduced rate - to calculate it when standard rate should be applied. Therefore, the main objective of the paper is to examine the extent to which VAT is evaded in this way and to study the most important determinants of it. The field research on bakeries in the emerging economy of Serbia showed that nearly a quarter of them misuse reduced VAT rate. Logistic regression showed that bakeries registered in VAT system for a shorter time and those located in smaller municipalities are more probable to misuse the reduced VAT rate. I argue that many bakeries unintentionally misuse the reduced VAT rate due to complex VAT regulation that is not easily accessible. Therefore, the national tax authorities should develop an electronic register of VAT regulation and reconsider punishment system.