URGENT ISSUES IN IMPROVING VALUE-ADDED TAX (VAT) MECHANISMS FOR REGULATING THE SHADOW ECONOMY

Abstract

This paper examines the pressing issues of improving value-added tax (VAT) mechanisms in regulating the shadow economy. The study argues that the shadow economy should not be viewed solely as tax evasion, but rather as a system of illicit profit generation arising from structural "breaks" in the VAT chain. Particular attention is given to the paradox of VAT neutrality, where in practice VAT becomes a source of additional value for informal actors through fraudulent schemes such as cash-out operations. The author proposes a set of innovative approaches aimed at enhancing transparency and efficiency in VAT administration. These include the introduction of a transactional transparency coefficient, integration of electronic invoicing with digital product marking, implementation of VAT incentives (amnesty) for businesses transitioning to the formal sector, and the application of the reverse charge mechanism in high-risk industries.

The proposed model redefines the role of tax authorities from a punitive institution to a digital platform operator, ensuring a closed and transparent VAT chain. As a result, financial gaps enabling shadow economic activities are minimized. The study concludes that effective VAT reform should focus on digitalization and simplification, making tax compliance more economically advantageous than tax evasion.