Impact of Tax Benefit Removal on Microbusinesses in Armenia
Microenterprises in Armenia have lost a significant tax benefit, effective July 1, 2023. They are now required to pay a monthly income tax of 20% for each employee, replacing the previous fixed tax of 5,000 drams (approximately $13). This change stems from amendments to the tax code, which experts warn could lead to job losses, reduced wages, increased informal employment, and potential business closures.
The previous tax regime, implemented on January 1, 2020, aimed to transition from family businesses to microenterprise activities. The government had introduced benefits such as exemption from turnover tax for enterprises with annual revenues up to 24 million drams (around $62,500) and a fixed income tax for employees at 5,000 drams monthly. These measures encouraged transparency in wage declarations and aimed to decrease informal economic activities. However, by 2022, the government recognized the rapid growth of microenterprises, leading to the introduction of a tax reform bill that ultimately eliminated the fixed income tax benefit.
Vladimir Shatverov, an economist and director of TEAM2b, illustrates the financial implications of this change. For a microenterprise with three employees earning 200,000 drams (approximately $520) each, the monthly tax burden will increase from 15,000 drams (around $39) to 120,000 drams (approximately $312), significantly raising the annual tax liability. Experts express concerns about the potential risks associated with this tax regime change. Shatverov notes that businesses may resort to hiring employees off the books or underreporting salaries to mitigate tax burdens. Furthermore, the erosion of trust between the government and private businesses could hinder future reforms, as business owners may become more cautious in response to frequent regulatory changes.
The lack of quantitative data in the legislation raises additional concerns, as it fails to provide a clear rationale for the adjustments. In response to inquiries, the Ministry of Finance stated that the revision aims to establish equal taxation conditions. However, experts argue that the approach is flawed, suggesting that the government should have adjusted income tax rates across the board rather than shifting the burden onto microenterprises while providing benefits to the IT sector. This creates an uneven playing field between different sectors of the economy, undermining the goal of equitable taxation.
The previous tax regime, implemented on January 1, 2020, aimed to transition from family businesses to microenterprise activities. The government had introduced benefits such as exemption from turnover tax for enterprises with annual revenues up to 24 million drams (around $62,500) and a fixed income tax for employees at 5,000 drams monthly. These measures encouraged transparency in wage declarations and aimed to decrease informal economic activities. However, by 2022, the government recognized the rapid growth of microenterprises, leading to the introduction of a tax reform bill that ultimately eliminated the fixed income tax benefit.
Vladimir Shatverov, an economist and director of TEAM2b, illustrates the financial implications of this change. For a microenterprise with three employees earning 200,000 drams (approximately $520) each, the monthly tax burden will increase from 15,000 drams (around $39) to 120,000 drams (approximately $312), significantly raising the annual tax liability. Experts express concerns about the potential risks associated with this tax regime change. Shatverov notes that businesses may resort to hiring employees off the books or underreporting salaries to mitigate tax burdens. Furthermore, the erosion of trust between the government and private businesses could hinder future reforms, as business owners may become more cautious in response to frequent regulatory changes.
The lack of quantitative data in the legislation raises additional concerns, as it fails to provide a clear rationale for the adjustments. In response to inquiries, the Ministry of Finance stated that the revision aims to establish equal taxation conditions. However, experts argue that the approach is flawed, suggesting that the government should have adjusted income tax rates across the board rather than shifting the burden onto microenterprises while providing benefits to the IT sector. This creates an uneven playing field between different sectors of the economy, undermining the goal of equitable taxation.