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League of Experts - LEX
Belgrade, Topličin venac 11,
Serbia and Montenegro

tel: +381 11 3034280, 3034281;
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e-mail: office@lex.org.rs
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Project Proposal


Author and coordinator:
mr Brankica Gagić


Direct goal of the project is to identify weaknesses of the Yugoslav tax system regarding small and medium sized enterprises (SMEs), as well as the identification and proposing of measures in the field of tax system and tax policy. The measures are aimed to promote a successful operation of these enterprises. This goal would be attained through a critical analysis of the existing tax system in Serbia and its comparison to the tax system of other countries in transition.

The indirect and long term goal is to define tax measures which the tax system in Serbia should permanently contain in order to establish such a tax treatment for SMEs, which is comparable with tax systems of the neighboring countries, as well as the countries of the European Union. Nevertheless, such measures should respect the specific situation of the Serbian economy and in particular the environment of the SMEs, that are practical in fledging phases or in very early phases of development.


In the first research phase, an identification and analysis of the current tax measures regarding the SMEs in Serbia is required, as well as identification of its effects on the beginning and further performance of business activities of the SME sector. The main goal of such an analysis is identification of the imperfections of the current measures both in the field of fiscal system and fiscal policy.

In the second phase, research should be concentrated on creation of proposals for changes in the tax system, with the aim to promote a more adequate tax treatment of the small and medium sized enterprises. It is important to consider a system of tax incentives in the initial phase, in the phases of the further economic live of the businesses, as well as in the processes of their legal transformation and termination. Equally, differences among various organizational forms of the SMEs (individual entrepreneurs, partnerships and SMEs organized as corporations) are to be considered, as well as the specific character of different business activities (industries).

The analysis and creation of measures for the Serbian tax system would also contain specific considerations regarding the total tax burden on the businesses, as economic and (eventually) legal entities, and on its owners, as entrepreneurs and shareholders of the interest in the enterprises.

During the research standard methods of the economic and legal analysis would be used, both during the identification of the existing tax system and tax policy weaknesses and during the creation of the suggestions and measures for its change or improvement.

Conception of new measures for the tax system and tax policy is to be situated in a tolerant range of acceptable deviations of the principle of economic neutrality of taxation of businesses.


Two main principles dominate the modern tax systems. The first is taxation according to the ability to pay. According to this principle, taxation is justified and tolerable only when the burden of taxation is sized according to the taxpayer ability to bear the burden. The second is the principle of economic neutrality. This principle is based on the general economic theory and is aimed to prevent arbitrary influence of the tax system on the market position of an enterprise. Taxation, according to this principle, should not make the position of a taxpayer better off, nor to worsen somebody's economic position at the expense of another. Because of the importance of these principles and its non-disputable value, it is necessary to respect them also in the field of enterprise taxation.

However, in all tax system, also including the most developed, which mostly appreciate these principles, there are certain departures of its full implementation. These departures are mainly in the field of tax incentives for certain categories of economic entities and particularly for the categories that, for different reasons, deserve additional protection. On the other hand, a specific, comprehensive system of different tax treatment for particular enterprise categories is uncommon.

In modern tax systems, the tax incentives are mostly devoted to the SMEs. A special tax treatment is very frequently envisaged in the tax systems of European market economies. So, for example, in the area of indirect taxes, i.e. value added tax, SMEs have a possibility to pay the tax as a lump sum. Additionally, these enterprises do not have to perform bookkeeping for the tax purposes and dispose with a possibility to opt for different tax regimes that are more favorable.

There are a number of reasons for a more favorable treatment of SMEs. The most important is a necessity to provide them with the ability to compete with the "big" sector, which have an easy access to the capital markets, possess connections and influence on the market and use advantages of the economy of scale. There are as well considerations in the tax area. For instance, the administrative burden of taxation of the smaller enterprises is relatively higher, because of smaller number of employees and less job-specialization.

Beside these common reasons for the improving environment for the SMEs , there are some relevant additional reasons in Serbia. Small enterprises that are to be privatized, i. e. small enterprises in state ownership are disappearing, and the private sector is only emerging. On the contrary, the big state enterprises are also supported by non-economic measures. Parallel with this, is the process of uncontrolled and mostly non-legal concentration of capital in the hands of a small number of privileged individuals. At the same time, the lack of new capital and investments is immense. Considering all these factors, development of an important number of small and medium sized enterprises is of a crucial importance:

  • For creation and performance of a small business a relatively small capital is sufficient;
  • Through its activation it is possible to effectuate already existing economic capacities;
  • They would provide with employment for private entrepreneurs and enable employment of other persons as well.
  • Finally, through development of SME development of a desirable and healthy market structure would be ensured, which would not be monopolistic or oligopolistic.

Therefore, there is an intensive need not only for changes in the economic system and economic policies, but also in the tax system and tax policy in order to create an encouraging environment for the SMEs.


This project is to be carried out within a 4 month period.

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