Inspecting the shadow economy

Jovana Stefanovic

Shadow economy - definition The part of an economy

which is neither taxed, nor monitored by any form of government. Unlike the formal economy, activities that are engaged in the informal economy are not included in the GDP of a country.

Wikipedia

At the end of February this year, inspections found 112 illegally employed people in 474 bakeries.

On the construction sites of Koridor 10 and 11, the inspections found 18 workers without a contract.

The ratio of restaurants and venues in which the owners issue their guest fiscal receipts, versus those which don’t, is almost 50:50.

In around 40 percent of the venues in Serbia, the inspections discover something, which falls under the shadow economy zone

Shadow economy justifications: trial runs, supposedly higher salaries;

700 000 people in Serbia are illegally employed; The employees which dwell in the area of the

shadow economy are being denied their basic rights such as social and health insurance, insurance against injuries at work, vacations…

Workers in the illegal employment zone

Youth (15-24 yrs. old) Lower educational level Sectors: production of

pastries, painting jobs, car repairs, beautician services, jobs in agriculture and the construction industry

The shadow economy in Serbia has been `stealing` around 30 percent of GDP per year

Each citizen in Serbia looses a monthly salary due to the shadow economy;

While in Bulgaria (31.9%) and Romania (29.1%) the share of the shadow economy in GDP is similar to the one in Serbia, in Croatia it amounts to 28.4 %, while in Germany it is 13,3. .

Serb

ia

Roman

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Bulga

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Croat

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Germ

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0%

5%

10%

15%

20%

25%

30%

35%

Percentage of the shadow economy in GDP

Percentage of the shadow economy in GDP

30% of GDP = 3> billion Euros = 2600km of highways = 10 bridges = health centers in every municipality in

Serbia = the amount of money NOT being invested each year in the growth and development of standards, public sector improvement, construction and financing

of hospitals, kindergartens, schools, etc.

A recent study conducted by IPSOS Strategic Marketing, shows that 92 percent of businessman considers the shadow economy the number one problem when it comes to dealing with unfair competition. Half of them, would not report a competitive company that does business illegally, due to the belief that it is a matter of the state;

A third of the interviewed businessmen don`t believe in the judiciary system, and 44 percent of them have no faith in work conducted by the inspections;

60 percent of citizens in Serbia feel strongly against the shadow economy, but at the same time are reluctant to ask for a fiscal receipt

Trust represents the basis of the fight against the shadow economy

A large number of the so called tycoons and their companies owe the state huge amounts of money in taxes, are a bad message for the majority of citizens reasoning - if they do not pay, then why should I?

Legal uncertainty + a lack of trust in state institutions + complicated and non-transparent tax system + high administrative burden on the economy = 30 percent of business transactions in Serbia are conducted in the gray area.

Factors which cause the shadow economy Rigid bureaucratic practices

of public institutions Numerous and complex

administrative procedures Frequent and extensive

changes in regulations Non-transparent budgetary

spending A general loss of confidence

in the government and institutions.

High unemployment rate High fiscal and quasi-fiscal

pressure, through tax, non-tax and para-fiscal charges.

`The fight against the shadow economy always implies a strategic game between the state and the taxpayers. In this `game`, the state is constantly inventing new strategies to combat the shadow economy while the taxpayers are figuring out ways to use it to their advantage`.

Milojko Arsic, Professor – Faculty of Economics

Inspection system downfalls Numerous (36 different inspections within the

competence of 12 ministries) and decentralized;  Lack of coordination is present among the

numerous inspectorates; all the inspections are conducted at the national and local level without a presence of a coordination body;

Extensive regulatory framework: there are over a 1000 regulations (individual laws and bylaws), which regulate the inspection procedure. Some of these regulations are outdated ( from the 1980`s and 1990`s);

Inspection system downfalls Lack of preventive

measures and risk based processes: inspections in Serbia usually react only when the damage is already done;

Supposed lack of jurisdiction over non registered subjects.

Inspection system downfalls In a recent survey

conducted by the Center for Democracy foundation, almost half (47,81%) of the citizens that participated in the survey had some resentment towards the work of inspections. Most often these involved:

Inefficiency Being out of date Inadequate behavior Failure to provide

appropriate information Incompetence Inadequate resources Unequal treatment of the

inspected subjects

One of the most usual complaints heard regarding the inspections in Serbia, is that the businesses which operate legally are subjected to frequent and numerous inspections, while those who work illegally can`t be punished because they don’t formally exist, therefore can`t undergo the mandatory checks and be subject to adequate punishment.

Inspection system downfalls

The newest Labor Law has vested the inspections with significantly greater authorities then before: between June 1st and September 30th 2014, the Labor Inspectorate has carried out as many as 16.893 surveillances of 354 employers. As a result, 14.464 persons were employed.

Based on the inspectorate's surveillances conducted in 2013, only 4.290 persons got regular jobs.

Labor Inspectorate novelties: direct access inspectors have to the Central Registry of social insurance, providing them with tools to identify illegal employment on the spot, and take appropriate measures without delay.

Minor offence warrants with possible fines witch can go as high as 100.000 RSD.

95 % of buildings in Belgrade have been built contrary to the issued construction permits;

Combating the shadow economy Adopting the Law on

Inspection Oversight The Law should introduce

modern inspection standards including prevention, risk assessment, coordination and cooperation, combating corruption and the shadow economy, and should significantly reduce them.

Fighting the shadow economy without focusing on its causes is not enough.

Creating a favorable business environment and proper conditions in which the state authorities function efficiently can prevent or at least significantly reduce the shadow economy.

A change in the social system in which the citizens are not afraid to ask for a fiscal receipt or report illegalities and in which the illegal entities realize they are better off in the legal area of business.

Thank youfor your

attention!