During a question and answer session with members of the government in the National Assembly on December 4, referring to the introduction of compulsory health insurance system which is considering setting a 4-6% tax, Prime Minister Nikol Pashinyan announced that it has been merely introduced for public discussion, and, besides, the government is due to reduce income tax starting from January 1.
“I don’t understand why some people are screaming that the government wants to raise taxes by 6 percent. Even if that is the case, the government is due to reduce rates on income tax by 14% for the same circles starting from January 1, but this is generally a topic on our agenda, and we will not be afraid to discuss it”, he said (7:29 am).
The Fact Investigation Platform verified whether the Prime Minister’s statement is true and whether the income tax rate will be reduced by 14% for some circles.
Flat income tax
On 25 June 2019, the National Assembly adopted the Tax Code package, which states that from 1 January 2020 the three-level income tax will be leveled (Article 150). This implies a single income tax rate at 23 percent, regardless of the size of salaries.
The three-level income tax rate system is currently in place: 23% for those whose earn less than 150,000 AMD, 28% for those whose salary is from 150.000 AMD to 2 million AMD, and 36% for those who earn more than 2 million AMD. That is, the draft proposes to tax everyone with a 23 percent income tax.
The code envisages a gradual reduction of the income tax rate to 20% by 2023.
For what specific circles is income tax reduced by 14%?
The change in the income tax since January 1 does not apply to those receiving salary up to 150,000 AMD. They will be taxed at 23% just as they are taxed currently.
And those who receive salaries of 150,000 AMD and above will be charged 5% less tax.
In fact, the circle indicated by Nikol Pashinyan is those who receive more than 2 million AMD. For these circles, income tax will be reduced by 13 percent, from 36% to 23%.
It should be noted that in Armenia, only 1,720 people receive a salary of more than 2 million AMD, which is only 0.3% of the total number of citizens working in the republic. According to the data on persons registered as hired employees in the Republic of Armenia during the previous year, the salary of about 64.9% of hired employees is up to 150 thousand AMD. 34.8% of hired employees receive up to 2 million AMD, and only 1720 people or 0.3% get more than 2 million AMD.
Thus, it results that Prime Minister Nikol Pashinyan points to these 1720 citizens, announcing a 14% tax burden reduction instead of 13%.
From 2020 the funded pension payment will again be 5% instead of 2.5%
It should be reminded that by amending the Law on Funded Pensions in 2018, the government reduced the mandatory funded pension pay by the population from 5% to 2.5%, which means that the payment made by the state became 7.5% instead of 5%.
After the change in the income tax, starting from January 1, 2020, the mandatory funded pension payment for the population will increase from 2.5% to 5%. For example, if a person receives a salary of up to 500,000 AMD, starting from January 1, he/she will make a 10,000 AMD social payment, and the state will in its turn pay 10,000 AMD.
Article 7 of the same law defines mandatory funded contribution rates, according to which the cumulative payment by people whose salary exceeds 600,000 AMD is greater.
By the way, the hired employees pay the obligatory 1000 AMD per month to the Military Insurance Fund.
Thus, we can state that Prime Minister Nikol Pashinyan’s statement that the government is due to reduce the rate on some of the taxpayers’ income by 14% on January 1 is not true. In total, taxes are going to be reduced by about 11.5% for those who receive salaries exceeding 2 million AMD, those who receive salaries exceeding 150 thousand AMD will pay 2.5% less tax, and as a result of returning to the former 5% of pension payments, the income of those who receive less than 150 thousand AMD will reduce by 2.5%.