Will lottery end tax cheating?
While international chains remit the value-added tax, it’s not always true of smaller businesses in Slovakia.
In an era of economic uncertainty and spiralling national debts, governments around the world are desperate to maximize their incomes. In Slovakia, where corruption and graft are a part of everyday life, the authorities have hit upon what they believe is the perfect solution — allowing citizens to enter a free lottery every time they pay value-added tax, in the hope that it will force businesses to pay what they owe.
It’s a bold move to focus on rewarding those who follow the law rather than punishing those who break it. The plan makes all receipts showing that customers paid VAT eligible for conversion into free lottery tickets, with cash and cars up for grabs.
The goal is to urge shoppers to request receipts at every point-of-sale, thus ensuring retailers issue more receipts and boost VAT revenues by properly recording cash transactions. In the long term, it is hoped the lottery will alter consumer habits by making the request for and issuing of receipts a behavioural norm. Ideally, the government will eventually be able to do away with the lottery.
“We see this as an opportunity to change people’s perception,” Finance Minister Peter Kazimir says. “Asking for and receiving receipts should be regarded as a standard business practice.”
That is not currently the case. The so-called VAT gap, a number estimating uncollected tax by extrapolating from annual GDP, is € 2 billion ($2.8 billion). In a country that only collected € 4.27 billion last year, that means up to a third of VAT is potentially being diverted away from government coffers. Much of this revenue goes missing via sophisticated fraud and business-to-business deals unrelated to daily cash register transactions, but Finance Ministry officials believe the VAT lottery could increase tax revenues by € 150 million during its first year in operation. But Kazimir has his eye on the long term. The main thrust of a tax lottery policy is “changing people’s preferences through the process,” says Marco Fabbri, an economist from the University of Bologna who studies such phenomenon worldwide.
Slovakia is not the first place to try a plan like this — Malta has its own tax lottery plan, and Georgia attempted one before scrapping it. They are more common in East Asia, where Taiwan has used an equivalent of a VAT lottery since 1951. While admittedly under markedly different conditions, tax revenues there jumped 76 per cent during the lottery’s first year. But prizes will be needed to win over skeptical Slovaks, especially business owners. Katerina Tomanova owns a nail salon in the western city of Dubnica and Vahom and said she only issues a receipt when asked by a customer, and rarely to “friends and acquaintances.”
She doesn’t believe the lottery will have much of an impact on more serious tax fraud.