At the end of 2019, the Government of Serbia passed a Decree introducing a new environmental tax that all companies must pay. Registration is mandatory for all legal entities and entrepreneurs, and lasts until the end of July this year.
What are the basic problems of the new environmental tax?
1. The tax is paid by everyone, not just polluters
First, the problem is that the tax is designed to really act as an imposition on the air we breathe. There are already various environmental taxes in Serbia, but they follow the principle of “polluter pays” – companies that emit greenhouse gases pay special fees, and their amount depends on the amount of pollution. Fees for the use of mineral resources work in a similar way – for example, gravel that is extracted from riverbeds will become more expensive and will be used less. Another example is the fees for products that become special waste streams: their treatment cannot be just disposal at the landfill, but they must be disposed of in a special way.
Such taxes and fees internalize all production costs, thus creating an incentive for the company to reduce pollution in order to reduce the amount of taxes it pays. This can be by introducing new technological processes or machines into production, by installing special equipment that collects harmful substances that are emitted (eg filters), or by simply reducing production.
However, the new environmental tax in Serbia does not work that way – instead of companies paying the amount only depending on the amount of pollution they produce, everyone pays the tax (although there is a division of companies explained later in the text, so not everyone pays the same amount). The tax designed in this way does not create any incentives to reduce disgust, but only serves to collect money.
2. Improper spending of funds obtained from fees
Secondly, if the goal of this tax is to finance environmental programs, then its introduction is a bad solution, at least because no one guarantees that the funds collected in this way will really be spent for those purposes. According to a study made by the Ecological Center Stanište from Vrsac, in the period 2010-2018 state bodies (republic level of government, but also local self-governments) spent about half a billion euros of funds from collected environmental taxes.
Until 2015, these funds were earmarked and could only be spent for environmental protection purposes. With the amendments to the Law on Budget System, the funds from these fees cease to be earmarked and can be officially used for other purposes. But the situation was not rosy until then: municipalities and cities (even the republic level of government) spent significantly less than the income from collected fees, and part of the funds either lay in the account or was redirected to other purposes directly in the budget.
Also, the fact that the money was spent does not mean that it was spent for environmental protection purposes as it was intended. The local co-governments that used these funds for various other purposes, which are otherwise important and good, but should not be financed by these fees, stand out here. These were projects to expand the water supply network, purchase new vehicles for local utility companies, build parking lots or pave streets, maintain public green areas, public lighting, and even catch dogs and pay fees and court costs in case of dog bites. Even if it seems to you that some of these purposes have something to do with environmental protection (eg the purchase of new garbage trucks by a utility company), the existing regulations refute this.
The Rulebook on the Standard Classification Framework and Chart of Accounts for the budget system classifies these expenditures as community development, water supply, agriculture, etc., so they cannot be financed from local environmental funds. Instead of introducing a new environmental tax, we should first bring order to this system and spend the funds already collected for these purposes.
3. Tax and fee inflation
Third, the situation in Serbia regarding taxes and fees and other parafiscal charges is quite problematic. Their number is huge: one USAID project counted a total of 1,025 in the period 2017-2019. A special problem is that these levies are not transparent: without their public register, no one knows what, to whom and how much more they have to pay in addition to ordinary taxes (profit, VAT, employee salaries, etc.). This situation was supposed to be regulated by the new Law on Fees, which was passed in 2019, but it seems that even that failed to prevent the introduction of new parafiscal levies, as is the case with this new environmental tax.
A publicly available register of parafiscal levies should be introduced so that all entrepreneurs can easily and simply establish their obligations (because they differ between municipalities and cities), as well as the rule that new parafiscal levies can be introduced only by law and not bylaws, which would increase predictability in business.
4. The state gives, the state takes
Fourth, in a situation of economic crisis, when the state gives money to companies (payment for salaries of employees) in order to prevent a wave of bankruptcies and dismissals, there is a complete lack of logic to then take even more money from companies. Instead, they should be left with more resources at their disposal.
Due to all this, we should first put this Decree out of force at least until the end of the year, and in the meantime change the way it is collected so that it best meets the needs of the situation in Serbia. This would mean providing incentives to reduce pollution, but also introducing a system of fees and charges that is predictable and clear in advance, and where the funds raised are spent on purpose, Talas reports.
