Management Theory and Studies for Rural Business and Infrastructure Development, Volume 20

The impact of shadow economy in the market of agricultural and food products on state budget

Albertas Gapšys, Ovidija Eičaitė

Abstract

The article analyzes the threat of shadow economy in the Lithuanian market of agricultural
and food products and assesses the impact of different tax policies on the trade volume
flows and state budget.
Shadow economy inevitably exists in each country but its nature depends on tax laws and
other economic activity regulatory acts and changes along with them. The higher taxes and more
regulation, the greater incentive is to grow shadow economy.
According to the Department of Statistics to the Government of the Republic of Lithuania,
most unaccounted activity, in absolute terms, is in the wholesale and retail trade. The unaccounted
activities of the Lithuanian trade in agricultural and food products include: cross-border
shopping, (the activity in which private individuals buy agricultural and food products abroad
because of lower taxes and import these products for their own consumption), shuttle trade (the
activity in which individual entrepreneurs buy agricultural and food products abroad and import
them for resale in market-places or small shops), cash and without bill settlements (sale of agricultural
and food products in market-places).
Summing up the indicators of consumption, supply, price level of Lithuanian agricultural
products, it was found that the greatest likelihood of shadow economy threats exists in the meat
and fruit and vegetable sectors. These products prevail in market-places, which are one of the
main shadow economy sectors in the retail trade.
The majority of EU member states apply reduced VAT rates for agricultural and food
products. This rate in size is close to rates in neighboring countries. In 2009, the situation in
Lithuania was opposite – reduced VAT rates for certain agricultural and food products were
withdrawn. As a result, market participants who pay taxes (retail trade enterprises and processing
plants) gradually lost their domestic customers. Shadow economy business cut them out. The
Polish zloty depreciation against the Lithuanian Litas and withdrawal of reduced VAT rate
shifted the choice of Lithuanian customers. Low prices of Polish agricultural and food products
stimulated Lithuanian people to go to the neighboring country and buy agricultural and food
products for their own consumption, as well as to engage in shuttle trade when the Polish agricultural
and food products were imported for resale in market-places. Due to the different tax
policy, taxing the consumer for VAT in the same market, individual market participants have
unequal conditions of the competition: retail trade enterprises apply 21 percent VAT rate for agricultural
and food products and market-places apply 0 percent VAT rate. Market-places are
trading area where taxes, compared to retail trade enterprises, are almost a fifth lower and prices
are lower about 10 percent. Market-place traders pay very small municipality taxes and mainly
resell agricultural products. After carrying out the survey of the market-place traders in Vilnius,
it turned out that the dealers accounted for about one-third of all market-place traders and dealers
of meat accounted about two-third. The official statistics do not receive information about the
turnover of market-place traders. This sector is one of the main officially unaccounted sectors.
After carrying out the research in the market-places in Vilnius, Kaunas, Klaipėda, Šiauliai and
Panevėžys, it was found that the average annual turnover of one market-place trader who sold
fresh meat and meat products exceeded 100 thousand Litas, the threshold for becoming VAT
payer. Each year the Lithuanian budget loses around 30 million Litas solely from the trade in
meat in the market-places. This money falls into the pockets of market-place dealers.

Keyword(s): trade in market-place, shadow economy, VAT rates


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Management Theory and Studies for Rural Business and Infrastructure Development eISSN 2345-0355

This journal is published under the terms of the Creative Commons Attribution-Noncommercial 3.0 Unported License. Responsible editor: Dr Audrius Gargasas.