Kosovo has a simple tax system andrelatively low tax rates. A risky feature of Kosovo’s taxsystem is the high dependence on border taxes. In 2012, 71percent of revenue was collected at the border in the formof trade taxes and value added tax (VAT) on imports.Shifting from border to domestic revenue collection isneeded. The simple tax system can make it easier for the taxadministration of Kosovo (TAK) to adjust direct taxes whileencouraging labor market formality. Low domestic revenuecollection suggests the presence of large tax gap - thedifference between the amount the TAK should collect and theamount it actually does collect. The wider social andeconomic consequences of tax evasion are high. Finding waysto raise domestic revenue to compensate for the decline inborder revenues is going to require actions on a number offronts. First, strengthening the TAK’s capacity to increasecompliance and reduce tax evasion, through judicial means.Second, reducing the informal economy will bring more firmsand employees into tax net. Third, efforts can be made toincrease revenues through existing taxes. Finally, policiesthat boost private sector growth, including an improvedbusiness climate, will help increase domestic production andtherefore tax revenues.
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