By Emil Danielyan
Despite the election-related political turmoil, the Armenian government raised its tax revenues by almost 34 percent in the first quarter of this year, putting it on track to meet its record-high budgetary targets. According to the latest fiscal data released by the Finance Ministry, the government collected 123.2 billion drams ($400 million) in various taxes, or 4.4 percent more than was projected by the state budget for 2008. Government expenditures rose at a slightly slower rate, resulting in a budget surplus of almost 16 billion drams.
The sharp increases were in part due to the fact that the 2008 budget for the first time includes social security taxes and government payments to the state pension fund. Nearly 28 percent of government money was spent pensions in this period.
The state revenues were primarily pushed up by a 43 percent surge in proceeds from value-added tax (VAT), most of them coming from imported goods. VAT thus solidified its status as the number one source of public funds, accounting for just over half of the tax revenues. Another eight percent of the total came from excise tax levied from alcohol and cigarettes.
The first-quarter tax revenues soared in relative terms as well, accounting for one quarter of Armenia’s Gross Domestic Product. With economic activity in the country traditionally gaining momentum after the first quarter and many businesses forced to make advance payments to tax authorities, the ratio will drop significantly in the coming months. According to the Finance Ministry, it stood at 16.1 percent in 2007. The proportion is very low even by the standards of former Soviet states, highlighting the scale of tax evasion in the country.
Armenia’s new Prime Minister Tigran Sarkisian has publicly acknowledged the seriousness of the problem, saying that improved tax and customs administrations is critical for the implementation of his government’s “ambitious” socioeconomic agenda. In a related development, President Serzh Sarkisian held separate meetings with senior tax and customs officials late last month, ordering them to stop harassing small and medium-sized businesses with the aim meeting their rising revenue targets.
Many local companies, especially those owned by wealthy government-linked entrepreneurs, continued to post suspiciously modest earnings in the first quarter. The State Tax Service (STS) collected 20 billion drams worth of corporate profit tax, equivalent to only 16.3 percent of the first-quarter total.
In the words of Eduard Aghajanov, an economist critical of the government, the rising share of VAT in the overall tax revenues means that tax collection in Armenia is improving at the expense of ordinary citizens, rather than the rich. “The amount of value-added tax which Armenia’s population pays when buying bread is higher than that of profit taxes paid by all of the country’s businesses,” he said. “This is absurd.”
Aghajanov also claimed that as much as 95 percent of payments to the state budget from large-scale importers of fuel and other basic commodities come in the form of VAT and other sales taxes that are ultimately paid by consumers. Virtually all of those importers run de facto monopolies and have close ties to the government.