The National Assembly has approved wide-ranging tax cuts which Prime Minister Nikol Pashinian’s government says will stimulate economic growth in Armenia.
A government bill passed by the parliament in the first reading on Friday will introduce a flat personal income tax, cut the corporate profit tax rate from 20 to 18 percent and make more small businesses eligible for preferential taxation. These measures are due to take effect on January 1, 2020.
Presenting the bill to lawmakers, Deputy Finance Minister Arman Poghosian said that it is designed to make the Armenian economy and especially its export-oriented sectors more competitive. He also stressed the importance of shoring up small and medium-sized enterprises.
The upcoming change of the existing income tax rates, which had been rendered more progressive by the former Armenian government, will primarily benefit relative high earners. The rates are currently set at 28 percent for monthly wages ranging from 150,000 drams to 2 million drams ($310-$4,150) and at 36 percent for higher incomes.
Armenians earning up to 150,000 drams per month now pay 23 percent of their income to the state. They make up around two-thirds of the country’s workforce, according to tax authorities.
The government bill will set a 23 percent tax rate for all individuals. What is more, that rate will be gradually cut to 20 percent over the next three years.
Government officials and Pashinian in particular have said that this will discourage employers from underreporting their workers’ wages for tax evasion purposes and spur broader economic activity. Artak Manukian, one of the 72 pro-government deputies who backed the bill, said on Monday that the uniform rate will also “simplify things” for businesses.
Critics, among them some of the 32 opposition lawmakers who voted against the tax cuts, dismiss these arguments. They say that the flat tax is unfair and would only widen the already serious income inequality in Armenia.
In another significant change, the government wants to increase from 58.3 million drams to 115 million drams the annual revenue ceiling for businesses that are exempt from profit and value-added taxes and pay a much lower “turnover tax” instead. Small businesses outside Yerevan earning up to 24 million drams annually will pay no taxes at all.
At the same time, the bill calls for significant increases in excise taxes collected from tobacco and alcohol. This is meant to partly make up for a short-term loss of the government’s budgetary revenues that will inevitably result from the tax cuts.
Visiting Yerevan in February, a senior official from the International Monetary Fund, Hossein Samiei, said the government should also offset those losses with a further improvement in tax administration. Samiei also cautioned that the tax cuts could have positive effects on the Armenian economy only in the medium term.