Your trusted source

The adoption of the new Tax Code of Armenia in its current form will encourage poverty among the population, enhance the shadow economy as well as provoke inflation, economist Mesrop Arakelyan commented on possible consequences of the draft Code in an interview with Panorama.am

Panorama.am: Much criticism followed the new Tax Code of Armenia. What is your position on that?Economist: Overall, the idea of having a Tax Code as a legal economic document should be welcomed, as we have needed it in Armenia for quite a long time. Working with separate laws regulating variety of taxes was difficult, entailing contradictions and problems. In this case placing all the legislation in one comprehensive document appears to be an important measure.  

In terms of the content, we just put together all the existing taxes, a kind of copy paste without necessarily any quality amendments, although in Armenia we need radical changes in certain taxes, with some of them subject to abolishment or replacement.  Having around two dozens of taxes in such a small economy is pregnant with hurdles and create unfavorable environment for doing business. Particularly, the practice of patent fees for the small business has lost its actuality. Moreover, unlike other taxes, representatives of the small business should pay the patent fees even before starting their business. This is a major problem for the small business, as taxes constitute a considerable part of the costs.

Patents fees should be replaced by turnover tax. Let me bring comparison of Georgia and the Baltic states which have only 5-6 taxes and provide a simple mechanism to develop the economy, while in Armenia taxes have been continuously added starting from the 90s.

Panorama.am: It turns out that big businesses, banks, medium and small entrepreneurs complain over the amendments proposed by the new Tax Code. Is their complaint justified?
Economist: The proposed turnover tax base of 40 million, which constitute now 115 million annually, will be problematic for the small business. That is to say companies having higher turnover will be subjected to common taxation paying VAT and profit tax. The difference is rather high and decreasing the taxable base for three times will cause problems for the business. The justification of the government is that the big business tries to penetrate and work under the acting threshold of 115 million AMD. Instead of applying viable administration to control the big business, they employ artificial tools and damage conscientious entrepreneurs.

In the face of the current economic slowdown, the proposed amendments will significantly increase tax burden on the small business. Thus, the complaint is justified. Considering the economic crisis and negative expectation for the upcoming years, the small business should have been provided additional favorable conditions instead. 

Panorama.am: Last year in these days the price hike in electricity rates provoked protests, known as “Electric Yerevan.” Why didn’t the businessmen and entrepreneurs go out to street?
Economist: Social discontent is observed in certain layers. For example, the middle class also views the proposed amendments of the profit tax rate as problematic. We should take into account that main debates over the amendments took place during extraordinary sessions, the extensive document was adopted on first reading within 1-2 days without even due discussions. I guess we will see wave of complaints in autumn. The reason is that the negative affect with this Code covers certain layers of the society, which in case with the electricity prices was larger. Nevertheless, I expect some societal discontent in autumn during the second reading of the draft Code.

 Panorama.am: What is your prediction whether will the National Assembly go through adoption of the legislation in its current state?
Economist: I think we will see what we had in the cases of hikes in electricity prices and transportation fees as well as the pension reform. That is a tactic of the government which usually plans certain concessions ahead of any policy implementation, pushes the civil society to a struggle, then the concessions take place making an impression the government has made compromises.   I expect certain concessions on taxes, which are subjected to rise. Economic entities may record a “victory”, while in the end we will have higher taxes  

Panorama.am: Why did the government decide to take the step in pre-election year?
Economist: The main reason is the budget crisis underway. In 2015 we registered a deficit of 240 milliard AMD  - equivalent to 5 percent of GDP. This appears to be unprecedented sum in the whole history of Armenia. This year we expect budget deficit of 190.7 milliards AMD.

In the occurred situation the government takes up urgent steps. It tries to overcome the budget deficit through increasing taxes. Statements over the fight against corruption, savings of the state expenses are mainly conditioned with the budget deficit. The government certainly realizes it lacks the capability to spend based on the current income flows, thus decreases the expenses and increases the taxes.

I think hike in tax rates will result in further economic slowdown and probably no taxes would be collected at all. Some politicians consider this document as a collapse of the economy. I do not share this opinion, since we first should have an economy before collapsing it. Overall, if the document is adopted as it is, people will become poorer, small enterprises will try to avoid taxes, which in turn may result in the growth of shadow economy, while the rise of excise tax may cause inflation.