Sunday, September 05, 2004


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Armenian Version:

1 September 2004

Light and shadow in Armenian business

The shadow economy in Armenia amounts to 50-60%, a figure published by the Armenian government itself. Unfair competition is a long-standing, well-known fact in Armenian business. Meanwhile, different organizations keep looking at the causes of this problem, and searching for a solution.

But in a country like Armenia it is not easy to guarantee equal competition among businesses, as is evidenced by a recent survey conducted by the newspaper Azg (See. Azg , August 13, 2004). About 50 % of 500 respondents consider the main obstacle to the development of the small and medium businesses to be:

- red tape (24.8%);
- protectionism/patronage (13.7%0;
- bribery (7%);
- management (5.4%).

According to studies by the NGO Union of Traders, each mid-level (or higher) functionary patronizes between one and fifteen businesses. According to their "caliber", these officials patronize small, medium, or big businesses. Of course, the "protection" for the majority of the 300 businesses considered big are the owners themselves. Some of these owners are members of parliament, the "tentacles" of others stretch to the President's Administration, to super-ministers, and so on.

Nevertheless, according to various official data, these 300 big companies provide some 60% of the state budget. This is an odd fact, if we consider that according to the list of "tax-payers who are more than one million drams in arrears" published by the State Tax Department, the majority of these big "budget filling" companies are unprofitable. Cigaronne, Royal Armenia, Kotayk, Jermuk Group, the Yerevan Milling Plant, Marriotte-Armenia, and other companies have presented the taxation authorities with annual balance sheets describing unprofitable businesses, and yet they have made their contributions to the state budget. Some invisible hand marks in advance the share that the big businesses have to pay as a "tribute", and this share doesn't change, whether the business is profitable or not.

This fact is evidence of the existence of protectionism coming from the highest levels of power. In any case, it is interesting to see how, in fact, the big profitable companies are registered as unprofitable. The scheme is simple: Company N, for example, imports 2X tons of food. Naturally, the company makes transport expenditures adequate to the quantity of the imported food. But the customs post on the border registers not 2X tons of food but just X tons. Thus, it turns out on paper that the registered quantity of imported food (half the real amount), created losses rather than profit for the company.

The big businesses with powerful "protection" feed one way or another the main artery of corruption, "fill 60% of the state budget", and put into operation the shadow extortion. Thus, avoiding taxes and custom duties has become a way of conducting business for big taxpayers.

Tsolvard Gevorgyan, the chairman of the Union of Traders, estimates that the direct taxes paid by big businesses amount to 20-25% of the taxes assigned to the budget.

As is known, the budget is generated from direct (income tax, profit tax) and indirect (VAT, simplified tax) assignments to the budget, and a country in which the collection of direct taxes exceeds indirect taxes is, if not developed, a steadily developing country.

Up to 70% of profit from business is concealed this opinion is held by businessmen, economists, and "protection", alike. On May 15, 1998, the government adopted Decision # 298, "On measures related to the introduction of cash registers." This process was supposed to be implemented step-by-step. But the 200 trade fairs and vendor's stalls operating in the republic were left out of this decision. To fill the gap, Decision #698 (October 30, 2000) was adopted. When competent authorities began implementing the requirements of the decision, we witnessed mass rallies and pickets organized by traders and vendors in front of the government and parliament buildings. Orinats Yerkir Party's political lobby in the parliament joined the protesters.

In November 2001, a joint working group consisting of representatives of the Ministry of Industry and Trade, the Ministry of State Revenues, the State Standards Department, and NGOs was set up to "study the process of implementation of the requirements of Government Decisions number 298 and 698." From November 12 to November 30, 2001, the working group conducted a sample study at the consumer goods markets (trade fairs) of Yerevan. It turned out that only 1-2% of the 5,000 stalls in the markets had cash registers. The Petak bazaar, in particular, had 264 stalls (though according to our information there were 800 stalls at Petak at the time of the inspection) and only 17 of them had cash registers; at the Hayastan bazaar there were 416 stalls and only two cash registers, at the Narek bazaar, 470 stalls and no cash registers, and so on.

Super-profit and shadow circulation

The bazaar owners pay to the budget 3,750 drams a month for one square meter. But the falsification starts with the declaration of the space, when a fraction of the actual area is declared.

"If I declare the actual size of my spot, where am I going to get the money to pay allowances to the families of fallen war veterans, or to socially insecure families?" one of bazaar directors, who didn't want his name published, asked us. The traders who rent spots at the bazaars (between $100 and $800 a month depending on the size) are not registered as individual businessmen or legal entities, and don't pay taxes.

Let us consider one example. A certain owner has 100 square meters of space, for which he pays 375,000 drams a month (100 X 3,750) or about $700. If he has 10 traders who pay about $400 a month each in rent he gets $4,000 a month. The remainder after subtracting tax allotments ($4000- $700) comes to a sizeable sum - $3,300. But in real life the situation is much more distressing, since the shadow amounts reach billions of drams.

Tsolvard Gevorgyan of the Union of Traders says that the tenants pay their landlords between $100 and $800 a month and "thus the same amount goes into the owners' pockets. The shadow sums come from within the retail margin, which is 3-5%. In the case of 100% commodity circulation, these sums arising from 5% of the circulation can reach $12,000-15,000. We should consider how much money would go into the Treasury if these sums were taxed and, what is more important, the extent to which this would contribute to the creation of equal competition among businesses."

The fact that the prices at the bazaars remain low compared to those in stores is due to the existence of the shadow economy. The bazaars have no shortage of customers, but the Treasury is deprived of its share of the profit.

Perfecting the legal framework

Bazaar owners are required by law to give working permits to legal entities or to licensed individual businessmen. Although the violation of this requirement is subject to confiscation of up to 50 % of the total turnover, and if repeated, is subject to criminal liability, the trade fair owners, with their powerful "protection" have always gotten around this Article of the Law on Taxation.

In 2002 the number of entities subject to simplified tax was 12,000, and in 2003 this number was 18,000. Thus, in a year the number of entities grew by 50%. If we add that during the same period of time, the rate for the simplified tax rose 75%, we will see after rough calculation that in place of the of 3.7 billion drams collected in simplified taxes in 2002, 9 billion drams was supposed to be collected in 2004, but in fact only 5.1 billion drams were collected. Some 3.9 billion drams in taxes was not collected, becoming shadow circulating capital.

Protectionism and corruption are alarming phenomena not only in the field of big business but within small and medium businesses as well. Tsolvard Gevorgyan believes that this situation is first of all the result of the imperfection of the legal framework. This fall the National Assembly will consider the draft "Law on Trading Workplaces" co-authored by the Union of Traders. It is unclear yet whether it will be possible to overcome political lobbying. If the law passes, cash registers will be required in the trade fairs. Otherwise, nothing will change; big business will remain in the realm of shadow monopoly.

Mariam Stepanyan

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