By Shakeh Avoyan
Prime Minister Tigran Sarkisian on Tuesday acknowledged the often arbitrary nature of tax collection in Armenia and pledged to combat a practice which he said is stifling economic growth.
The issue was high on the agenda of his meeting with a group of wealthy businessmen affiliated with the Armenian Union of Manufacturers and Entrepreneurs (UME). They complained that tax officials are harassing local businesses to pay more taxes in order to meet their rising revenue targets. They said the practice has become even more widespread since the launch of the Armenian government’s latest crackdown on tax evasion this spring.
The government says the crackdown is necessary for executing its record-high budget for this year. Its tax revenues rose by almost 34 percent in the first quarter of 2008 despite political turmoil caused by Armenia’s February 19 presidential election.
Local businessmen claim that officials from the State Tax Service (STS) are simply forcing them to contribute more to the state budget without offering any proof of tax evasion. “They are making inexplicable demands,” Areg Ghukasian, owner of Armenia’s largest salt mine, complained to Sarkisian. “They are saying, ‘You paid this much taxes last year and must pay double that amount this year.’”
“This is a very correct observation,” said Sarkisian. “I must admit that we still have serious problems in tax collection.”
“A tax inspector comes and tells [a company] to pay twice as much,” he said. “The latter wonders why. The inspector responds, ‘There is economic growth in our country, [tax] targets have been raised, and so you must pay more.’ This is a terrible disease that is destroying our economy.”
“The amount of taxes paid by a company is not conditioned by the results of its economic activities,” added the premier.
Arsen Ghazarian, chairman of the UME, said he and other businessmen would readily pay more taxes if they felt that the government treats all local firms equally. But Ghazarian did not name any of the entrepreneurs that he believes grossly underreport their profits. “We would be ready to sign a public contract with the government that will commit us to fighting against the shadow sector and obliging our members to pay taxes,” he said.
Sarkisian assured him that the government-linked businessmen and large-scale importers in particular will not get away with tax evasion anymore. He said the business community, for its part, should cooperate with tax authorities in addressing the problem.
According to Sarkisian, a major source of tax evasion in Armenia is the abundance of retail markets where small traders enjoy preferential forms of taxation and do not have to following accounting rules mandatory for ordinary shops. He said the fact that those markets account for more than 80 percent of retail trade in the country, he said, significantly reduces proceeds from the collection of value-added tax, the number one source of the government’s tax revenues.
“There are 374 markets in Armenia,” said Sarkisian. “Can you imagine that? This is unacceptable.
“It is ordinary shops that must work the Republic of Armenia. Eighty-five percent of trade turnover must be carried out through shops … We won’t become a [normal] country unless we change this situation.”
“This will certainly be a painful process as we are going to force thousands of people to return to the legal field,” he said. “Our first target will be this 85 percent trade turnover.”