Academic journal article Management : Journal of Contemporary Management Issues

Vat Rate Change and Its Impact on Liquidity *

Academic journal article Management : Journal of Contemporary Management Issues

Vat Rate Change and Its Impact on Liquidity *

Article excerpt


In Croatian tax system, Value Added Tax (VAT) is an indirect national tax. It is based on the destination principle. Net credit method is applied when calculating VAT. It is also the net multi-stage sales tax, which is calculated at every stage of the business cycle (production - sales cycle), but only on the amount of the added value generated in the respective stage. From the very beginning of its application in the Republic of Croatia, VAT has been holding a key position in the Croatian tax system. VAT revenues account for more than a half of all tax revenues of the consolidated general government (without social securities contributions) (Jelcic & Bejakovic, 2012).

The data in Table 1 indicates that in the period from 2007 to 2013 the share of VAT in the total government budget revenues of the Republic of Croatia ranged from 34.85% to 37.11%. The most significant change of share is evident in 2009 (a decrease of 2.08 percentage points).

In the tax revenue structure, VAT revenues have the most significant share. In the analysed period from 2007 to 2013, this tax type amounts from 58.20% to the highest 63.80% of the total tax revenues. VAT rate change introduced in August 2009 had its full-year effect on its share in tax revenues in 2010. The second largest tax revenue refers to excises contributing from 17.1% to 19% to tax revenues.

Global and national financial crisis mainly affected the liquidity of companies and caused the economic stagnation of the business sector. It is quite understandable that even the smallest increase of taxes, in this specific case of VAT, can further affect the level and formation of available payment funds and therefore the tax liability payment.

This crisis has also shown that the national economy cannot be successfully managed without the monetary and fiscal policy being compatible with the objectives of the society. In the previous period, fiscal policy was not used to encourage sustainable growth and development, and it was suddenly necessary to radically compensate for it in a very short period of time when the crisis occurred. This also provides a chance to test the functioning of fiscal multipliers and automatic stabilizer.


The impact of the tax system on business activities of a company is an important component of the fiscal policy. Previous researches on the impact of tax rate changes on business activities of a company have been quite long-lasting. Researches on the impact of tax rate changes on the corporate income tax date back to Modigliani and Miller (Gordon and Lee, 2000). Lately, since the data at the micro level has become more accessible to the public, researches have been conducted more frequently. Previous researches on the impact of tax on business activities of a company have been mainly related to the impact of corporate income tax change on profitability of business and rarely included the Republic of Croatia. Similarly to profitability, there has not been any significant research on the effect of value added tax change on liquidity of Croatian companies. Researches on the effect of Value Added Tax on company's business are not so frequent.

When considering previous researches, Beigi et al. (2013) concluded that there is a negative relationship between tax and profitability. Gatsi et al. (2013) also confirmed a significant negative relationship between tax and profitability, but their research focused on corporate income tax. Hedia and Amira (2012) studied the impact of tax incentives and profitability which led to the conclusion that there was a positive relationship which also corroborates the aforementioned researches. Ironkwe and Peter (2015) studied the impact of VAT on profitability and found a negative relationship between them. Varedi and Ebrahimi (2015) examined the relationship between VAT and both liquidity and profitability and discovered a positive impact of value added tax on liquidity and profitability. …

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