Turnover tax loopholes cause AMD 36bln annual damage to Armenia`s   budget 

ArmInfo. In Armenia, the non-taxable value added tax threshold of 115 million drams is high, even in comparison with European countries, said the head of the State Revenue Committee, Rustam Badasyan, on May 31 in parliament at the preliminary hearing of the annual report "On the execution of the State Budget of the Republic of Armenia for 2023".

At the same time, as Badasyan pointed out, he sees the problem  elsewhere. "In reality, are we creating special taxation systems to  promote small-medium businesses, or does this make it possible, for  example, for large taxpayers to carry out aggressive tax planning,"  he asks.

The second problem is that the turnover tax system is often operated  not by representatives of SMEs, but by large players - as a result of  business fragmentation. As a result, the state treasury, due to this  scheme, receives approximately 36 billion drams annually, the chief  tax officer added.

The government of Armenia plans to review the turnover tax system  from October 2024, and from 2025 to narrow the scope of beneficiaries  of the micro-enterprise system. Currently, 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).  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.

Now the Ministry of Finance proposes to double the turnover tax rates  established for main types of activities, providing the opportunity  to reduce the tax payable through documented expenses. According to  the Ministry of Finance, this will stimulate the transition to a  common taxation system.

Thus, early studies by the Ministry of Finance indicated that 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 trade - by 2.6 times , in the field of accommodation  and catering - 3 times, in the field of real estate - 2.1 times, in  the field of professional, scientific and technical activities - 2.8  times. 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.

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; the  opportunity to engage in notary, lawyering and organizing lotteries  in the value added tax system; in the micro-enterprise taxation  system, the activities of taxpayers engaged in the purchase and sale  and/or rental of real estate in the regions, hairdressing services,  body care, car maintenance services, intermediary services, software  development and construction work, assessment and measurement of real  estate , activities related to the organization of baths and saunas.

The adoption of the project promises the state treasury an annual  increase in turnover tax revenue of approximately 17.8 billion drams.

Earlier, representatives of SMEs told ArmInfo that the share of small  and medium-sized businesses in Armenia's GDP, according to the latest  data, is about 25%. Meanwhile, the figure in developed countries is  usually in the range of 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. As pointed out by the  President of the SME Cooperation Association Hakob Avagyan, the bill  was adopted by the Cabinet of Ministers without taking into account  the risks and assessing its impact, which will lead to higher prices  for services, an increase in the "shadow" and the closure of a number  of business entities.