The individual income tax
The Individual Income Tax is regulated by the Individual Income Tax Law in the tax system in Serbia. This law determines the taxation method and procedure for the natural persons who generate income. It is obvious that this form of taxation is one of the most complex to understand, not only for the non-residents, but for the residents of Serbia, as well. Therefore, in order to understand how it functions in Serbia, we have to take a look around and compare the taxation systems across the rest of the world. In the theory of various tax legal systems, as well as in the practice, there are three taxation systems: global, schedular and mixed.
Where are these systems located on the world tax map, and what do they truly mean?
In short, the global system refers to all income generated by the taxpayer, which is why it is also called synthetic. Tax rates are progressive. Although this method of taxation includes the taxpayer’s total tax authority, it is also subjective, since it takes into account the taxpayer’s economic power (from personal characteristics to family circumstances, etc.), as well. It is in use in the USA, Canada and Australia.
Schedule is a component of income or individual income, hence the schedular taxation system is defined as the individual, independent taxation of each part of income, or individual income. Proportional tax rates are applied. This taxation system is analytical and objective, meaning that only the individual tax authority is taken into account, and not the total economic power of the taxpayer. It is in use in the Congo, Burkina Faso
The mixed system of taxation represents a combination of the schedular and the global system. In essence, the schedular method is applied, but if the taxpayer’s income exceeds a certain (statutory) limit, global taxation is used as a corrective. It is applied in Serbia, Chile…
It is noticeable this map does not include Great Britain, Germany, Denmark, Russia, Slovenia, Romania and similar countries, i.e. there is no economy of those countries which have shown the greatest capital mobility in the contemporary world. This capital mobility in particular encouraged many countries to reevaluate the global taxation system which led to the rise of so-called alternative method of taxing the income of natural persons. This is actually a special manner of schedular taxation system, which represents a combination of progressive taxation of labour income, and a unique taxation of capital income. The alternative method of taxation is distinguished as follows:
– Dual Income Tax (Serbian: Dualni porez na dohodak) which is in use in Denmark, Finland, Austria, Belgium, Hungary, Slovenia, the Czech Republic. Which, in practice, appears to be a combination of synthetic and dual tax for the tax systems of Great Britain, France, Germany, and Italy.
– Flat Tax (Serbian: Proporcionalni porez na dohodak) where the taxpayer is given significant exemptions, after which a proportional tax rate is applied to all types of income. In Estonia, Latvia, Lithuania, Romania and Russia, the capital income is included also. It represents the territorial concept of income taxation since it only pertains to income that is generated within the country.
– Negative Income Tax (Serbian: Negativni porez na dohodak) The concept, which was created by Milton Friedman in the United States, refers to the so-called subsidies, or tax credits that a natural person receives from the government.
The aforementioned information makes it evident that income tax is a complicated subset of all tax systems, including the tax system of the Republic of Serbia. With the passing of the Individual Income Tax Law (Serbian: ZPDG) in 2001, substantial tax reform started after the period of application of the mixed system of taxation that was in place in these regions of the SFRY from 1958 to 1991. The Serbian legal system often amends this law in order to foster an environment that is conducive to investments and economic progress; in fact, from 2001 to the present, there has hardly been a year during which no revisions have been made.
We have mentioned before that in Serbia the mixed method of taxation of the income of natural persons is in use, which means that the schedular (individual) taxation is applied, and as its correction, an annual individual income tax is used, which is more similar to the global, synthetic taxation. Comprehending and differentiating the basis and corrections of the individual income tax represent a stumbling block for all individual income taxpayers.
The tax system, regulated by the IITL (Serbian: ZPDG), divides the total income into seven schedules, each of which has a different tax rate. More specifically, the legislator identified 7 schedules in Article 3 of the IITL (Serbian: ZPDG), or 7 types of income that are subject to the individual income tax, including:
– income from self-employment
– income from copyright and related rights and industrial property rights
– income from real estate
– capital income
– other income
Income is taxed regardless of how it is acquired—in cash, in kind, via labor, or in some other way.
The Serbian legislature created the following three methods for the payment of the individual income tax:
- by deduction from each individual income (an example is taxation of salaries, etc.)
- based on the decision of the competent tax authority (an example is a lump-sum entrepreneur, etc.)
- self-taxation (an example is annual individual income tax, etc.)
Previously we have written about who is considered a taxpayer, and what are the exemptions from paying the individual income tax, which can be found on the following links: