Rising prices for services, going into shadows and closing businesses  - incomplete list of "expectations" from revision of turnover tax  rate from SME Cooperation Association President

ArmInfo. According to the latest data, the share of small and medium- sized businesses in Armenia's  GDP is about 25%. Meanwhile, in developed countries, this indicator usually varies between 50-60%.

And instead of developing additional tools to support SMEs, the RA  authorities are tightening conditions in the form of a double  increase in the turnover tax rate with a further abandonment of the  system as a whole.  This says a lot about the attitude of the  authorities towards the sector. President of the SME Cooperation  Association Hakob Avagyan stated in a conversation with an ArmInfo  correspondent.  The expert recalls that micro, small and medium  enterprises (MSMEs) account for 90% of enterprises, 60- 70% of  employment and 50% of GDP worldwide. As the backbone of societies  around the world, they contribute to local and national economies.  MSMEs have the potential to transform economies, provide new  jobs  and drive equitable economic growth if given the right support.  In  2018, the share of small-medium enterprises in GDP was estimated at  24% and in 2021, when Nikol Pashinyan's government approved its  program of activities for the next 5 years, it set a goal to increase  the figure to 55% by 2026, Avagyan noted. Then the RA Cabinet of  Ministers pledged to take consistent steps to remove obstacles on  this path. In particular, they promised to expand the tools for  supporting SMEs for innovative entrepreneurs and increase access not  only to finance, but also to skills, knowledge and connections.

In this vein, the SME community positively accepted the return to  VAT-free y-o-y turnover through the turnover tax (replacing VAT and  income tax) of up to 115 million drams from January 1, 2020 in  Armenia.  However, then the government decided to close regional SME  Development Centers (for the first time since 2002). Now it has  decided to double the turnover tax rate from October 2024, and to  narrow the scope of beneficiaries of the micro-enterprise system from  2025. "On May 2 this year, the Cabinet of Ministers adopted a bill  that concerns more than 55,000 business entities without proper  discussion. At the same time, we have repeatedly signaled that such a  key decision cannot be made based solely on official data -  discussions should  be held with focus groups, with representatives  of SMEs in the capital and regions, since they have completely  different problems," the head of the NGO emphasized.

Hakob Avagyan does not believe the assurances of the Ministry of  Finance that for those who can document their expenses, the tax  burden will not increase, but may even decrease. "Business does not  like emotions. A number of areas would voluntarily take advantage of  this provision, and it already exists, if they had such an  opportunity. But, there are areas where the possibility of a tax  deduction is actually impossible, for example, for resellers at the  Meymandar food market or at the Malatya night market. In addition, as  of today there are still goods, in particular from Turkey, that are  imported into the Republic of Armenia through roundabout routes and  that do not undergo proper customs clearance," he explained.  In  addition, the situation of small shops ,which can barely withstand  competition with large retail chains that dictate the rules in the  market, will worsen even more. "Shops in the regions, in conditions  of a high tax burden and where it is initially impossible to fully  document expenses, which are still trading "according to debt  notebooks," will close or go into the "shadow," the expert noted.

Moreover, he noted, this revision also promises an indirect  additional financial burden for business entities.  If previously  some small businesses conducted their own accounting, now they will  have to resort to the help of a qualified accountant, which involves  new costs.  The legislative initiative will also hit the legal  community of Armenia, Avagyan said. Thus, establishing a turnover tax  of 10% of profits from October 2024, and introducing a general tax  system, including VAT of 20% and income tax of 18%, starting in  January 2025, will lead to a sharp increase in the tax burden on  lawyers. "And we, ordinary citizens, will have to pay for this, since  raising the rate will inevitably lead to an increase in the price of  legal services by at least 30-40%," he noted.

Avagyan was also skeptical about the Ministry of Finance's  expectations regarding additional revenues to the state treasury as a  result of the adoption of the project in the form of an y-o-y  increase in turnover tax revenues of approximately 17.8 billion  drams. "That is only possible if this reform succeeds, and I argue  that it will fail. This is not the first time such an attempt has  been made, but unlike the current Cabinet of Ministers, the previous  one entered into dialogue and abandoned "clumsy methods," he said.   In this regard, the head of the Association noted, that  the world  has long come up with such a tool as assessing the impact of  legislative acts. This tool allows you to assess the consequences of  the new legal norm, based not only on the Ministry of Finance  figures. They will find out what challenges resellers of agricultural  products, importers and producers of raw materials, etc. may face.  And after comparing and verifying all the data, the possible impact  of the proposed initiative is derived.

"Unfortunately, we still have no idea what an alternative taxation  scheme means for a start-up business, and the government does not ask  the question of if it is so bad, why this scheme  is still in effect  in neighboring Georgia, and why a "simplified approach" for start-up  businesses is maintained in developed countries, with a significant  share of SMEs in GDP, " the SME Cooperation Association summarized.

Notably, currently turnover tax is paid by business entities whose  y-o-y turnover does not exceed 115 million drams. 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-fold more - 10%. As a result, taxpayers try to be and remain in  this system at any cost, including hiding the real sales volumes, or  dividing the business into parts, so as not to cross the value-added  tax exempt threshold and to avoid the general taxation system.