ArmInfo. Armenia should abandon the turnover tax; there should be one taxation system in the republic, Armenia's Premier Nikol Pashinyan stated on May 2 at a meeting of the Cabinet of Ministers, during which legislative amendments were approved, providing for a double increase in the turnover tax rate.
As Minister of Finance Vahe Hovhannisyan stated when presenting the draft law, the main goal of the turnover tax system as an alternative to the main taxation system was to provide business entities with the opportunity to carry out activities in conditions of simple tax accounting and soft administration. However, research shows that instead of an alternative general taxation system, the turnover tax system has turned into a preferential taxation system. In particular, when comparing the tax burden of the general taxation system (VAT and income tax) and the turnover tax system in certain areas of economic activity, it turned out that in almost all industries (except for those industries in which the main transactions are exempt from VAT) The burden of the general taxation system significantly exceeds the burden of the turnover tax. Thus, the total tax burden for VAT and income tax in the manufacturing industry exceeds the burden for turnover tax by 2 times, in construction - by 2.6 times, in the field of trade - by 2.6 times, in the field of accommodation and public catering - 3 times, in the real estate sector - 2.1 times, in the field of professional, scientific and technical activities - 2.8 times.
In addition, past experience and studies of the activities of the turnover tax and the microenterprise system show that the activities allowed in these taxation systems are either similar in nature to the activities prohibited in these systems, or, due to their characteristics, are accompanied by other activities , which cannot be taxed in these tax systems, for example, commercial activities in the city of Yerevan cannot be taxed in the micro-entrepreneurship system, and car maintenance activities, which very often also involve the sale of goods (spare parts), can be carried out in the micro-entrepreneurship system.
Taking into account the above, the Ministry of Finance proposes to revise the turnover tax system from October 2024, and from 2025 to narrow the scope of beneficiaries of the micro-enterprise system. The goal is to reduce the difference between the tax burden of the turnover tax system and the general taxation system, increase incentives to document the expenses of business entities, as well as make the two taxation systems for SMEs more targeted.
Thus, according to the initiative, the turnover tax rates established for main types of activities will be revised, with the possibility of reducing the tax payable through documented expenses. At the same time, it is proposed to set rates below the current minimum or fixed rates; in this case, the tax burden may be reduced for business entities that have the appropriate level of documentation. For the above types of activities, establish a unified approach to the possibility of reducing the tax payable through documented expenses.
In particular, today a 5% turnover tax rate has been established for entrepreneurs in the field of trading activities, with the possibility of deducting 4% of documented expenses from liabilities, but not less than 1.5% of turnover. As part of the initiative, it is proposed to set a rate of 10% of income with the possibility of deducting 9.5% of expenses, but not less than 1.0% of turnover. Then the effective tax will increase from 2.3% to 4.1%, providing the state treasury with additional taxes in the amount of 4.9 billion drams.
Representatives of public catering at this stage work with a 6% turnover tax with the possibility of a tax deduction of 3% of documented expenses, but not less than 4% of turnover. As the Ministry of Finance previously stated, Armenian restaurateurs currently pay an average of 4.3% of sales turnover, which they assess as a low tax burden. In this regard, it is proposed to establish a 12% turnover tax with the possibility of a tax deduction of 9% of documented expenses, but not less than 3.5% of turnover. In this case, the effective tax will increase from 4.3% to 6.6%, providing the state treasury with additional taxes in the amount of 4.9 billion drams.
Changes are also planned for representatives of production activities. Currently the sales tax rate is 3.5%. It is proposed to set a rate of 7% of income with the possibility of deducting 5% of expenses, but not less than 3.5% of turnover. In this case, the effective tax will increase from 3.0% to 5.3%, providing the state treasury with additional taxes in the amount of 0.6 billion drams.
For other types of activities, the current sales tax rate is 5%. It is proposed to set a rate of 10% of income with the possibility of deducting 6% of expenses, but not less than 4.5% of turnover. In this case, the effective tax will increase from 5% to 8.5%, providing the state treasury with additional taxes in the amount of 8.7 billion drams. The authorities also plan to expand the range of activities prohibited from taxation under the microenterprise tax and turnover tax systems. In particular, from 2025 it is recommended to limit; A. the opportunity to engage in notary, lawyering and organizing lotteries in the value added tax system; b. in the micro-enterprise taxation system, the activities of taxpayers engaged in the purchase and sale and/or rental of real estate, hairdressing services, body care, car maintenance services, software development and construction work, assessment and measurement of real estate, organization activities baths and saunas. They will have to operate either under the sales tax or VAT system.
The adoption of the project promises the state treasury an annual increase in turnover tax revenue of approximately 17.8 billion drams.
At present, the turnover tax (replaces VAT and income tax) is paid by business entities whose annual turnover does not exceed 115 million drams (from January 1, 2020, Armenia returned to non-taxable annual turnover up to 115 million drams - ed.). This group includes SMEs, individual entrepreneurs and notaries. We are talking, in particular, about payments of 5% from the turnover of commercial activities and 3.5% from industrial activities. According to the Ministry of Finance, early research by the department indicated that two businesses engaged in the same activity find themselves in an unequal position - small and medium-sized businesses pay turnover tax, large businesses pay income tax and VAT. As a result, the effective tax paid by SMEs is 3-4%, and large businesses pay 2-2.5 times more - 10%. As a result, taxpayers try to be and remain in this system at any cost, including hiding real sales volumes, or artificially splitting up the business, so as not to cross the threshold not subject to value added tax and not move into the general taxation system.
As tax experts previously told ArmInfo, the Ministry of Finance is very disingenuous, claiming that for those who can document their expenses, the tax burden will not only not increase, but may even decrease. "This cannot be. The VAT payer works with a very small margin, which allows him to somehow compete with large businesses, but he will not be able to reduce this margin due to turnover and expenses. Today people work with a margin of 4-5%, if we take into account bank commissions of 2.5% for non-cash payments and turnover tax, then 3-4% are already minus, and the business, even with proper accounting of taxes, will not be able to work in this mode," explained tax expert Tigran Keyan. In his opinion, this will ultimately result in a rise in prices for specific goods and services and the closure of many economic entities. "The current government at one time promised to support small and medium-sized businesses and introduced the concept of micro-entrepreneurship with a preferential tax regime. Today, small businesses are told: we are abandoning our previous policies and goals and are tightening the conditions of your existence, which predict something close to death for you. It turns out that the business was simply deceived," concluded Tigran Keyan.
