Tax revenues in Armenia decline: Reasons and future expectations
Tax revenues in Armenia
Over the past five years, Armenia’s state budget has been significantly bolstered by tax revenues, which have increased annually. Following the 2018 “Velvet Revolution,” the shadow economy shrank, and companies began paying taxes voluntarily.
However, in the early months of this year, the amount of tax revenue has decreased. What is the reason for this, and what are experts predicting?
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Businessman urges to pay taxes
Gnel Karapetyan has opened three kiosks in Yerevan where fresh fruit drinks are prepared for passersby. He describes himself as an “honest and responsible taxpayer.” Despite occasional issues with the tax authorities, this does not affect his approach to work:
“For several months, we couldn’t issue receipts to our customers due to technical problems with the cash register. We have already paid a fine for this. But I have never evaded taxes. All my employees are registered for the actual salary they receive, and all income is fully declared.”
Gnel lived in Europe for five years and has a principled attitude towards matters such as being a good citizen, a responsible taxpayer, and someone who cares about the environment:
“If I paid taxes there, why shouldn’t I pay them in Armenia? It is thanks to the taxes I pay that my children can attend public school and kindergarten for free and receive medical care at the clinic.”
Walking through the streets of Yerevan, he notices businesses offering “entertainment services” like trampolines and children’s car rentals. He is confident that these businesses are not registered and do not pay taxes.
“I don’t think taxing these services would drastically change anything. Currently, the majority of the budget is covered by construction and the mining industry. But for the future, it is important to change people’s attitudes so that they do not avoid their obligations to the state and pay taxes. This also makes you a more demanding citizen. You want to know where the taxes you pay are going,” he says.
Based on the tax revenue collected during the first months of 2024, it has become evident that the government may not fully meet its tax revenue plan. Rustam Badasyan, head of the state Revenue Committee, informed parliamentarians of difficulties in achieving the plan. Finance minister Vahe Hovhannisyan did not rule out the possibility that expenditure cuts might be necessary as a result.
The tax plan for 2024 amounts to 2 trillion 613 billion drams (approximately $6.8 billion). The Ministry of Finance forecasts that this amount may decrease by 60 billion drams (about $155.8 million).
Government officials do not rule out that the situation may change by the end of the year, potentially allowing the tax plan to be met. However, experts are skeptical. They argue that key economic sectors lack the tax-generating potential needed to make the government’s plan realistic.
According to economist Armen Ktoyan of the National Center for Public Policy Research, tax revenue shortfall is expected to be at least four to five percent.
In his opinion, the forecasts for tax revenues did not account for the structural peculiarities of the economy and its ability to generate tax revenues in key growth-driving sectors:
“Construction and operations involving precious metals are the main generators of economic activity. Taxes primarily come from apartment sales, which do not coincide chronologically with the actual construction process. As a result, although construction shows growth, it does not yet lead to an adequate increase in the tax base.”
Regarding the import, processing, and re-export of precious metals, Ktoyan notes that while this activity significantly enhances foreign trade turnover and economic activity in related sectors, its contribution to tax obligations is modest.
“The export of automobiles from Armenia to EAEU countries has significantly decreased since last year. The impact of restrictions became noticeable this year, significantly affecting VAT revenue shortfall,” Ktoyan adds.
Armenia is a member of the Eurasian Economic Union (EAEU), comprising Russia, Belarus, Kazakhstan, and Kyrgyzstan. Sanctions against Russia since 2022 have sharply increased the re-export of automobiles from Armenia. Armenia joined the EAEU in 2014, with customs duties for importing cars adopted within the EAEU affecting Armenia from 2020. This initially allowed Armenian citizens to import and clear cars cheaper than in other EAEU countries, but since 2022, the customs clearance process in Armenia has aligned with Russia’s regulations. Moreover, as of April 2024, taxes and fees on automobile imports into Russia from EAEU countries, including Armenia, have increased.
Opening Armenia’s second wind
Armenia’s economy, as part of the Eurasian Economic Union (EAEU), has been subjected to ‘shock effects’ caused by the Russian-Ukrainian war and continues to be in this state, according to Armen Ktoyan.
In his words, Armenia is becoming a transit country for Russia in every respect. From this perspective, the economy is ‘significantly revitalized.’ However, there is a risk of certain distortions in the economic structure. These operations do not generate the expected taxes, leading to a shortfall in tax revenues. This is explained by the fact that they occur within the common market of goods, services, and capital of the EAEU, of which Armenia is a member.
The expert sees the solution in diversifying exports and developing export directions. He emphasizes the importance of innovation, economic modernization, and efficient resource utilization.
Economist Vilen Khachatryan states that the slight fluctuation seen earlier this year cannot seriously impact the economy and can be regulated through internal debt:
‘Over the past years, our economy has reached a state where it can easily withstand such minor shocks. We can manage deviations of up to 10 percent without harming the economy. We currently have all the tools to neutralize risks.’
According to the expert, Armenia may achieve progress in several areas in the near future:
‘Currently, the service sector is a sufficiently active direction with serious potential. I would also note the development of tourism and related infrastructure.’
Khachatryan disagrees with colleagues who predict a decline in the construction sector:
‘There may not be peaks like in previous years, but construction can maintain its development pace.
Unlocking regional communications is also very important for Armenia. Many states are currently interested in regional infrastructure. With effort, Armenia can reap significant dividends.’
What the state spends tax revenues on
Given Armenia’s numerous security challenges, taxes are an especially crucial factor as they help the government fulfill its obligations. Additionally, funds are needed for a long-term and costly program—providing housing and social support to refugees from Nagorno-Karabakh. Therefore, a reduction in tax revenues could lead to serious problems.
Is the state prepared for them? Experts hesitate to provide a definitive answer. In any case, they speak of the necessity for risky and radical decisions. They argue that the logic of economic development requires a change in economic priorities.
Currently, priorities are seen in construction, information technology, and services. Agriculture has been largely neglected. Economists believe this sector could develop if, for example, farmers were provided with cheap credits to implement innovations. Looking at larger-scale transformations, they suggest considering military industry and ore processing.
Tax revenues in Armenia
