VAT Cash Accounting Scheme: Lifeline for BiH Economy

WRITTEN BY: Ajka Baru?i?, M.Sc. Institute for Youth Development KULT

The Law on VAT in BiH stipulates that business owners are required to pay VAT between the 1st and 10th day of the month for the previous month, whether or not their customers had paid for their products and services. Therefore, business owners must first pay the state 17% of the sold goods’ or service’s selling price although they have not yet received payment for the goods or services from the customers. In many cases, the collection period for receivables is uncertain and long, sometimes taking up to several months or years, or in some cases the receivables remain uncollected. In addition to that, business owners must find a way to pay salaries and the corresponding contributions for their employees, and pay for operational and other business expenses. In the midst of all that, hardly anything is left for investing in growth, development, new jobs, innovation and other demands made by modern business trends. Business owners very frequently take out bank loans to cover all their expenses, which exacerbates the problem through high interest rates and difficulties in keeping pace with the loan payments dynamic. Such problems mostly plague small business owners. A business owner in Bosnia and Herzegovina who launched his/her own business, securing employment for him/herself, employed other people, pays taxes that are then injected into the state budget to cover the state administration expenses, is struggling to stay afloat. Ample negative statistical data testifies to the unfavorable nature of the business ambient of the domestic economy. This discouraging business environment in which businesses are struggling to survive is undoubtedly perpetuated by the VAT invoice accounting scheme.

Some European countries are bolstering the liquidity of small and medium-sized enterprises by introducing the VAT cash accounting scheme. This means that business owners pay VAT to the state only after having collected their receivables from customers who received their goods or services. This system, however, regulates the flip side of this issue as well. Namely, business owners can deduct entry tax for the goods and services bought and received from their supplier only after having paid their suppliers. Some EU member states have been using this system for years; it has been in use the longest in the United Kingdom and Ireland – since 1995. The countries using this scheme set a threshold for tax payers based on annual turnover, which in some cases amounts to as much as 2 million Euros (e.g. Spain, Ireland, Italy), 1.6 million Euros (e.g. United Kingdom), or, most frequently, half a million Euros, such as in Bulgaria, Portugal and Romania. The threshold can be lower, such as in Austria (110,000 Euros), Slovakia (100,000 Euros) and Slovenia (400,000 Euros). Some countries from the region have recently introduced this VAT cash accounting scheme for small businesses; tax payers in Serbia and Croatia with annual turnovers of up to 400,000 Euros have been eligible for this scheme since 2013 and 2015 respectively. Additional conditions can be introduced as well. In most cases, countries specified that this scheme cannot be used for importing and exporting goods and services, and that tax payers must have paid all their liabilities for public debt or only for VAT from the period preceding their entry into the system, and that the business owner must not have any recorded VAT offences, etc. The VAT cash accounting scheme is optional, i.e. eligible business owners can decide whether or not they wish to use it. The use period and leaving the system (under certain conditions, depending on the country) is between 6 months and 4 years. However, all countries stipulate that upon leaving the system, the businesses must pay all their liabilities within a certain time frame, unless it is necessary to follow regulations regarding liquidation or bankruptcy.

The topic of the initiative to amend the Law on VAT by introducing the VAT cash accounting scheme has been raised over the past several years by chambers of commerce, chambers of crafts, employers’ associations and business owners. This year, the Institute for Youth Development KULT took more concrete steps, with the support of the informal Network for creating a better business environment in BiH, by inviting business owners, chambers of commerce and crafts and employers’ association to support this initiative by signing a letter of support, with the intention of entering the proposal for amending the Law into the parliamentary process. Business owners say that this VAT scheme would greatly facilitate their current operations, improve their liquidity, and, in the long-term, create the conditions for generating new jobs and investing in development. The question is whether the authorities are willing to tackle this sensitive issue, considering the fact that the majority of the budget funds comes from indirect taxes, which include VAT. Since the Law on VAT was adopted in 2006, i.e. a new tax system was introduced to replace the previous sales tax system, it is reasonable to expect that after 10 years of implementing this Law innovations should be considered in order to help the economy and improve the long-term collection of VAT, both of which the aforementioned change could achieve. 


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