At the end of last year, when Budget 2007 was being planned, it was anticipated to accumulate more than 80 billion AMD, and the state got anxious about how the tax collecting bodies were going to get that money. So about 60%, or 48 billion AMD, was supposed to be gathered at the expense of taxes. In 2007, about 280 billion in taxes was supposed to be collected. At that time, the tax bodies rushed to announce that they’re going to collect that money at the expense of improvement of the bureaucracy, reduction of shady economy, etc. Let’s also remind that at the beginning of the year, when meeting with the chairmen of the tax and customs services, the latter demanded to work more productively to fight against the shady economy. And now, as of the past 5 months, the tax service managed to collect 103 billion AMD, which compared to the same period of last year is more by 23 billion AMD. And the taxes collected during 2006 are more by 55 billion AMD, compared to the same period of 2005. At first sight, the rates of tax collection have been considerably increased. However, when we compare it with the Gross Domestic Product, we see that the index of Armenia is quite low. In 2005, the taxes in the GDP amounted to 13.6%, and in 2006 this index has been decreased by 0.1%, and amounted to 13.5%. This index is low compared to CIS counties as well. The portion of taxes in the GDP in CIS wavers from 20-25%. Even in our neighboring country, Azerbaijan, it amounts to 22% and in developed countries up to 40% and even more. The deputy-chairman of the State Tax Service of RA, Armen Alaverdyan, thinks that the portion of taxes in our GDP is low because Armenia, compared to other states, has lower tax rates. The reason of that is that we don’t have oil, gas and other valuable exportable goods. Besides that, in our country agriculture is not yet taxed. Yesterday, during his press conference at the National Press Club of Armenia, Alaverdyan said that this year the GDP-taxes balances is going to be 15.7% and this index is going to increase year by year. On May 24 the government ratified the three-year tax inspection policy. Such a policy was the first to be adopted in Armenia. It anticipates various methods by which the tax policy can be implemented in a much better way. “This policy prompts that in the coming years the main source of increase of budgetary incomes is going to be not the increase of tax rates but a more improved tax policy,” stated Alaverdyan.
At first sight, it seems that the RA government and the tax bodies have decided to collect more taxes and reduce the shady part of the economy. However, when we better survey this policy, it seems that the will of the government to collect more taxes doesn’t include the fairs, malls, hotels, construction, etc, which are the most profitable businesses. The tax body did its best to bring the fairs to the tax field but didn’t succeed much. It tried to do the same thing this spring but the NA elections interrupted it. The government persuaded the renters of the fairs to go and work without paying taxes until fall. They didn’t wish to see so many people discontent on the threshold of the elections. The owners of fairs are taxed to a certain extent, though. They pay fixed tax for each square meter of their fairs/malls. According to Alaverdyan, this tax amounts to 1800 AMD per square meter in downtown Yerevan but the owners receive ten times more profit from the tenants. In Hrazdan fair, 220,000 AMD is levied for 9-10 square meters. The same situation is in all other fairs. But we can’t definitely say that the owners of malls are hiding their taxes. Pretty much all of them pay their 1,800 AMD per square meter. It’s just that they get extra profit from the tenants. They don’t get taxed for their super profit. We may definitely say that this sector is in the shade, because when signing the tenant-owner contract most of the actual monthly fee is minimized 7-8 times. It would be naïve to assume that the government is incapable of bringing this sector to the tax field. They just don’t show political will for that. “We have an assignment from the Prime Minister to regulate this sector. We must solve this issue,” said Alaverdyan.
This is quite welcomed. The next sector where a great amount of taxes may be levied is the construction sector. During the past 5-6 years, apartment building has been actively developing in Armenia, yet the legislative recommendation to bring this sector to the tax field was made only 5-6 months ago. According to the data of the RA Statistics Service, during 2006 over 600 billion AMD was spent on construction, and a 365 thousand square meter area was submitted to exploitation. However, it’s impossible to know how many taxes were paid from the sector. The fact that the construction sector is very profitable isn’t doubted by either constructors or average citizens.
The next sector that we can consider not taxed by the state is the hotel or services sector. According to Alaverdyan, the tax code is still too incomplete to fully regulate the tax policy for this sector. The thing is that most of the large hotels of Armenia are protected by the status of “foreign investment”. And this gives the privilege to be exempt from taxes. For the most part, our hotels belong to local people, but they register those in the names of foreigners to acquire the status of a foreign investor. That’s the reason our immense hotel complexes never become great taxpayers. According to statistics, the hotel business annually develops by 20-22%. The number of tourists visiting our county increases approximately as much as the business develops.
According to Alaverdyan, the tax bodies have issues with importers as well. “The importers by benefiting from gaps in the tax legislation and are able to import great amounts of goods and consume those through their networks,” mentioned Alaverdyan. “However, the cost of the actual sale and the costs shown to tax bodies very often don’t match.”
Thus, we enumerated only three sectors, which are in the shade. Mr. Alaverdyan on his part added a few more – taxi, Internet and other services. The number of businesses in the shady economy can be added to extend to cover the whole economy. So it turns out that the RA economy is mainly in the shade, and only a small part of it is in the legal field. Will our government have the political will to bring all the sectors to the legal sphere?