The grey economy in construction materials production sector causes losses worth more than EUR 12 million to the state budget in Latvia every year, according to results of a study carried out by Latvian Construction Materials Manufacturers.
At the same time, the study outlines as a major problem the weak capacity of controlling institutions in collecting taxes from all market players, which makes the situation critical for honest businesses.
Illegalities committed in the mining and quarrying sector, envelope wages and sales of construction materials to private persons without charging VAT as well are some of the main problematic areas outlined in the Business Against Shadow Economy (BASE) study Grey Economy in Construction Materials Sector performed in summer 2021.
CEO of Latvian Construction Material Manufacturers Association Leonīds Jākobsons says unfair competition
is an everyday occurrence for honest construction material manufacturers in Latvia ans has been for many years.
Now that Latvia is implementing the European Green Course Policy, multiple important infrastructure projects are close to completion and the country experiencing economic challenges due to the pandemic, this problem has become more prevalent than ever, says Jākobsons.
«Every year the growing taxes and weak ability of controlling institutions to collect hem creates millions worth of losses for the state budget, slows the development of the business environment and attraction of investments,» stresses Jākobsons.
Read also: Grey economy in Latvia reaches 25.5%
The study shows that illegal activities in the mining and quarrying sector represent the most significant problem for the construction materials production sector, says Jākobsons. This, according to conclusions, causes not only millions worth of losses for the state budget and creates unfair competition among businesses, but also causes damage and pollution to the environment, as well as many risks for the construction sector as a whole. Factors that contribute to the problem include insufficient control and weak monitoring from controlling institutions, ineffective penalties and the long bureaucratic licensing process.
«Strengthening the capacity of controlling institutions, improving inter-institutional cooperation, creating efficient management and control mechanisms and quality control system are some of the most important tasks the state should carry out to resolve the current situation,» adds the CEO.
He believes it would help push out unfair practices from the mining and quarrying sector, as well as improve the situation with non-declaration of mined volumes, illegal burying of waste and failure to perform re-cultivation.
Jākobsons stresses that a solution to the aforementioned problems and mining and quarrying sector would bring a great contribution to the state budget in the form of tax revenue. It would also help limit envelope wages and prevent problems associated with the supply of low-quality construction materials to the construction sector.
«The grey economy remains one of the main obstacles that prevent the influx of investments if we compare Latvia to other Baltic States. For years foreign investors have been telling us about the need to battle grey economy in numerous other sectors. This, together with the growing tax burden and other market challenges reduces Latvia’s attractiveness as an investment destination in the region,» says one of the authors of the study, a researcher of grey economy, Stockholm School of Economics in Riga professor and director of the Sustainable Business Centre and board member of the Foreign Investors Council in Latvia Arnis Sauka.
Envelope wages and undeclared cash circulating make up a major portion of grey economy in the mining and quarrying sector, the study reports. Although this problematic issue is well-known and policy-makers have had it on the discussion table for years, there is still no decisive solution.
The study reveals that as long as envelope wages, illegal employment and secret job relations exist, the state budget will continue losing tax revenue and state social insurance contributions worth nearly EUR 6.5 million every year. To resolve this problem, it is necessary to start with increased control of high-risk businesses and reduction of cash in the industry, authors of the study say.
Study: grey economy in construction materials production causes Latvia considerable losses every year
