Microbusinesses lose tax benefits

Micro-enterprises in Armenia have lost their important tax benefits. From now on they will have to pay monthly income tax at the rate of 20 percent for each worker instead of the previous 5000 drams [about $13] per month. This is a consequence of changes in the tax code that came into force on July 1, 2023.

According to experts, canceling the privileges used by micro-businesses can lead to negative consequences. In particular, to the reduction of workplaces at micro-enterprises, the reduction of employees’ wages, the growth of shadow activities, and even the closing of businesses.

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The previous regime of taxation of micro-entrepreneurship entered into force on January 1, 2020. It was introduced to replace the family business with the concept of “micro-entrepreneurial activity”. At the same time, the government offered the following benefits:

• enterprises with an annual turnover of up to 24 million drams [about $62,500] were exempted from turnover tax,
• The income tax for employees of micro-enterprises became fixed – only 5000 drams per month.

“These steps were taken in order for micro-enterprises to declare the real wages of their employees, as a result of which a decrease in shadow activity was expected. At the same time, microbusiness workers received their income legally, since the change did not involve large costs for the owner,” economist and director of the consulting company TEAM2b (TimTuBi) Vladimir Shatverov explains.

According to him, the privileges offered by the government “inclined many businessmen to respond to the government with a handshake”. As a result, the number of micro-enterprises in Armenia increased significantly over the last three years to more than 35,000.

Against the background of this boom, in 2022 the government said they did not foresee such a rapid growth in the number of micro-enterprises. And in August 2022, they introduced a draft law on tax changes. It was approved, which led to the cancellation, among other things, of the benefits of monthly payment of a small fixed income tax for each employee.

Considering this point as the most significant of the legislative changes, Vladimir Shatverov explains its meaning with a concrete example.

“For example, a micro-enterprise has three employees, each of whom receives a salary of 200 thousand drams [about $520]. The owner still paid three taxes in the amount of 15 thousand drams [about $39] per month. And since July of this year, he needs to pay 20 percent of their salary, which will amount to 120 thousand drams [about $312]. In annual calculation, this will amount to an even more significant sum.”

“Sunny Food” produces canned goods in the border village of Garibdzhanyan in Shirak region.

“Any additional tax liability is an additional burden for the organization. And the smaller the business, the more difficult it will be for it to cope with this tax burden”, director Anait Harutyunyan says.

She believes that the consequences of the change in the tax code will be manifested in different ways – from the increase in the prices of goods and services, the reduction of the number of employees, to the liquidation of businesses.

According to the young entrepreneur, these changes in the tax policy of the state can lead to greater caution among businessmen.

“When tax liabilities increase, businessmen are more cautious. They think longer whether it is worth making investments, starting a business, expanding the existing one, or it is very risky.”

Experts share the concerns of microbusiness owners.

“It is clear that as a result of the recent regulations, some new employees will be hired without registering. Or they will register, but with a lower salary than they will actually receive. This is the first obvious risk of this change.

Another risk is that micro-enterprises, which have already honestly declared the real salaries of their employees, try to gradually reduce the amount of paid salaries in order to save on taxes,” Vladimir Shatverov says.

However, he considers the loss of the government’s trust in private business the worst consequence:

“When a businessman sees that the state is constantly changing the rules of the game, he is much more cautious about all reforms. And in the future, when the government offers even something good, many will think longer and act more cautiously. As a result, it will be more difficult to implement possible subsequent reforms. One of the principles of the tax code is the construction of long-term and stable relations, which is actually violated by such actions.”

Experts find it difficult to predict the consequences of these tax changes. The government did not include in the bill any quantitative data or official statistics that could be the basis for calculations about possible developments.

“There should be numbers at the base of the draft law, so that the changes were convincing, so that the citizen understood why the state introduced them. But the government did not calculate or publish the number of microbusiness workers. The government did not publish its calculations and forecasts, which would allow us to understand the logic of the implemented changes,” the head of the Union of Employers of Armenia, Gagik Makaryan, says.

“Review of the tax burden on the part of employees of micro-enterprises aimed at establishing equal conditions of taxation”, the Ministry of Finance told JAMNews.

The mechanism of ensuring equal conditions for business, which the ministry refers to, experts consider “implausible”.

“To ensure equal conditions, it was necessary to change the size of the income tax, because everyone has to pay it to the state. At the same time, the state offers benefits in the field of information technologies. We are talking about the bill to reduce the income tax of IT companies to five percent. It turns out that the state, reducing the income tax of the IT sector, is trying to compensate for part of its losses due to taxes from micro-entrepreneurs who have employees,” Gagik Makaryan says.

Shatverov shares his opinion. He says that tax changes would be more acceptable for business if they were introduced gradually.

“For example, the monthly income tax of micro-enterprise workers could be set at the rate of five percent of wages in the first year, 10 percent in the second year, 15 or 20 percent in the third. A gradual increase in the tax burden would give business time and the opportunity to adapt to changes. And it would be useful to provide some alternative benefits for those enterprises for which the tax burden increases sharply.”

Makaryan says:

“The role of microbusiness for the country may be small from the point of view of the amount of taxes paid to the treasury, but large – in social terms. These enterprises provide employment not only for themselves, but also for a certain number of employees. Thus, they contribute to the reduction of unemployment. Their employees do not become a burden for the state as unemployed.”

This tax change just creates unequal conditions for microbusiness and IT workers, he adds.

“We create unequal conditions between economic sectors. If it’s about creating a level playing field for entrepreneurs, why do they make an exception for the field of information technology? In this sense, I don’t see logic in the actions of the government.”

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