Turnover tax doubled in Armenia 

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.