Business people and experts call for changes to the flat-rate taxation threshold
Small business owners in Serbia operating under the flat-rate tax model have been working under the same tax conditions for years, despite significant changes in their economic environment.
The key threshold for remaining within the flat-rate taxation system – an annual turnover of up to six million dinars – has not been updated since 2013.
Since then, according to official data, consumer prices have risen by as much as 70%. In other words, the real value of this threshold has significantly diminished, making it increasingly difficult to stay in the system.
The Law on Personal Income Tax stipulates that if an entrepreneur earns more than six million dinars in a calendar year, they lose the right to flat-rate taxation. This threshold used to suit the average business conditions of smaller tradespeople, hairdressers, IT consultants, and similar professions.
“Today, with inflation having eaten away a substantial part of that amount, more and more people are falling out of the system – not due to wealth, but because of basic market dynamics,” states an expert analysis in the Grey Book recently published by NALED.
An even greater inconsistency arises when considering the VAT threshold, which is eight million dinars. Unlike the flat-rate threshold, however, the VAT threshold is based on the last 12 months of business activity, rather than the calendar year. This means an entrepreneur can enter the VAT system even if they have not yet surpassed the six million dinar mark in the current year, as the periods do not align.
Once the VAT threshold is crossed, the flat-rate taxpayer automatically loses the right to simple taxation and must switch to maintaining business books. This brings additional costs, including hiring an accountant and taking on more administrative responsibilities. Yet, what frustrates flat-rate taxpayers the most is the lack of flexibility in switching between different taxation regimes.
Specifically, the eTaxes system, introduced as part of the digitalisation of the tax administration, allows for changes in the taxation method only up until 15 December for the following year, and exclusively electronically. Moreover, the application allows only two transitions: from flat-rate to self-taxation and from self-taxation to the personal salary system. What it no longer allows – which was previously common – is a direct transition from flat-rate taxation to the personal salary system the following year.
This restriction is further complicated by a 2020 opinion from the Ministry of Finance (no. 430-00-7/2020-04), which established that an entrepreneur who loses the right to flat-rate taxation during the year cannot switch to personal salary payments in that same year – they must wait until 15 December to apply for the following year. Although this opinion carries significant weight in practice, it is not based on any legislative amendments. Neither the Personal Income Tax Law nor any other regulation explicitly prohibits such a transition within the year. In fact, before the introduction of eTaxes, the change could be made in writing without complication.
In practice, this means that an entrepreneur who unintentionally or due to business growth surpasses the eight million dinar threshold must exit the flat-rate system, enter the VAT regime, keep books, but cannot ease the transition by switching to personal salary taxation – even if that would be the most advantageous option.
To address the problem for most flat-rate taxpayers, analysts in the Grey Book suggest amending the Personal Income Tax Law so that the upper turnover threshold for flat-rate entrepreneurs in the year preceding the one for which tax is being determined—or the planned turnover at the start of business activity—is aligned with the VAT threshold, raising it from six million to eight million dinars.
Similar practices are already in place in neighbouring countries such as Croatia and Montenegro.
“We propose two options for resolving the issue of transitioning entrepreneurs from flat-rate taxation to personal salary taxation,” say NALED analysts.
The first solution is for the Ministry of Finance to issue an opinion or enactment on the application of Article 33a of the Personal Income Tax Law, stating that a flat-rate entrepreneur may opt for personal salary taxation upon exceeding the threshold, which would be binding for the Tax Administration.
“We believe that the existing provisions of Article 33a of this law do not present an obstacle to changing the taxation method. Alternatively, we propose amending Article 33a of the Personal Income Tax Law to explicitly regulate the method of transitioning from one taxation model to another. Additionally, it is necessary to adapt the eTaxes application to allow this functionality,” conclude experts in the latest edition of the Grey Book.
Source Link