Low Earners Face Tax Squeeze in Armenia

A bill now before the Armenian parliament will create more rigorous tax rules for some of the country’s lowest earners.

The rules govern people working in 13 different trades, including tailors, cobblers, cleaners and private tutors – typically self-employed, and typically with irregular income flows.

If approved, the changes will come into effect in January 2016.

There are two major changes to the system. First, these self-employed service-providers used to be charged a straight fee for an operating license, whereas now they will have to pay a “license tax” on a regular basis. Second, the money will now go into local rather central government budgets.

The authorities say the tax is meant to reduce the large number of people who work in the shadow economy. Also, local government will not only benefit from the extra revenue, it will find it easier to collect taxes because it has a better grasp of who is doing what in the locality.

The amount this group of people pays will stay roughly the same. A license to trade within the capital Yerevan, for example, will cost 69,420 drams (144 US dollars) in taxes, as opposed to the current annual fee of 78,000 drams (162 dollars).

The tax is a flat rate, not based on earnings, and it will be  reduced if it is paid two or three years in advance. But as lawyer Arpine Yeghikyan points out, people in precarious and low-paid work are unlikely to find the money up front. They can also opt to confine their activities to one locality and pay less than for a license for the whole country. Again, though, this restricts their earning opportunities, Yeghikyan says.

Paylak Tadevosyan chairs Taxpayers’ Defence, a pressure group. He welcomes the proposed law and says it will create a fairer system without increasing poverty levels.

“Right now, the situation is unequal – one cobbler pays a licence fee, and the next doesn’t,” said Tadevosyan.

As might to be expected, the law has not met with much enthusiasm among those who will be affected.

Others, too, feel it is unjust for the government to hound low-paid groups for tax evasion when big, politically connected businesses get away with it. A different law announced last year sparked protests by traders reluctant to document every single transaction for tax purposes. (See Taxing Times in Armenia, and a follow-up story from February.

“The current government hasn’t taken a single thorough-going step to bring the large taxpayers and monopolies out from the shadows,” Edmon Marukyan, an independent member of parliament, told IWPR. “Therefore, initiatives to collect taxes from cobblers and blacksmiths do the government no honour at all.”

Yeghikyan believes taxation policy should be flexible enough to encourage small-scale business to opt in rather than out. All this bill is likely to do is make people on low incomes even worse off.

Armenia has a large informal economy from which the government earns no revenues, and evasion takes place among tax-registered companies, too.

The International Monetary Fund estimated that Armenia´s shadow economy was equivalent to around 35 per cent of gross domestic product a few years ago. Other experts say the figure is probably over 55 per cent.

In an article published on the Verelq.am news site in September, Hrant Mikaelyan, a research fellow at the Caucasus Institute in Yerevan, described how some of the small business sector and almost all micro-businesses – meaning family-run ventures and the self-employed – were not registered for tax at all.

However, as Mikaelyan pointed out, “the public is more tolerant of tax evasion by small and medium-sized businesses than by big business”.

Nane Aharonyan, an English-language tutor, is a good example of the kind of self-employed worker the government wants to bring into the tax system.

She works from home and has been teaching for four years now, but her income is erratic as she can go for months without any students.

“How am I to pay taxes under the circumstances?” Aharonyan asked. “The government should busy itself with the large taxpayers, which really would replenish the government budget, instead of watching out for anyone who’s at home trying to earn their daily crust, and taxing them,” said Aharonyan.  “I will pay taxes when I’m convinced that everyone is equal in this state.”

Seventy-eight-year-old craftsman Abo is a well-known figure in Artashat, a town some 30 kilometres outside Yerevan. He has been repairing shoes and electronics at home for the past 15 years. He charges up to 500 drams (about one dollar) for a shoe repair job and he receives only two or three orders a week. 

Abo described how someone came to talk about his tax situation a few years ago. 

“I made them ashamed. They went away and never came back,” he said. “I can’t live off my pension alone. I am forced to do work at home and earn a little money.”

Nune Hovsepyan is a freelance journalist in Armenia.