Balance between economic growth and social protection

Balance between economic growth and social protection

Leyla Abdullayeva, expert at Trend 's Analytical Center 

Reducing direct tax rates and improvements in tax administration [provide invoices in electronic form] which will take effect from January 1, 2010 first of all will significantly improve tax collection. The top rate of income tax "pushes" entrepreneurs and those with higher incomes to "the shade".

With the maximum rate of income tax totaling 35 percent in Azerbaijan, Department for Preliminary Investigation of Tax Crimes at the Ministry of Taxes periodically reveals tax evasions. Thus, more than 2,000 violations of tax laws were revealed in May.

Income tax is constantly decreasing in European and Baltic countries. For example, as of January 1, 2008 Estonia and Lithuania reduced rate of income tax from the population. In addition, there will be decline in 2011 by one percent annually. Rate of tax will decrease to 18 percent in those countries for the coming 3 years. Now, most of states which are interested in reducing tax burden and encouraging economic growth tend to flat-rate income tax. This is exactly what is Azerbaijan is going to do.

On June 19, the Azerbaijan parliament adopted draft amendments and additions to the Tax Code. The rate of tax will be reduced from 22 percent to 20 percent. The maximum amount of income tax for employees will be reduced from 35 percent to 30 percent, and for individuals engaged in entrepreneurial activities without creating a legal entity - from 35 percent to 20 percent.

Amendments are also expected to be made to the simplified tax system. Currently, physical and legal persons pay taxes under simplified tax system, quarterly turnover of which does not exceed more than 22,500 manats. From next year, legal entities with an annual turnover of up to 150,000 manats and individuals with an annual turnover of 90,000 manats will be subject to simplified taxation system. In the case legal entities and physical persons surpass that limit; they are not required any more to register with the Ministry of taxes as VAT payers within 10 days.

Decrease in income taxes in the country could become a catalyst for the development of small and medium businesses. Small and medium-sized enterprises are backbone of any developed economy, and especially in the context of the global financial crisis. Lowering tax rates will provide support to small and medium-sized enterprises, because they bore the burden of labor market and employment/ therefore, it raise the living standards in the country.

From January 1, 2006, tax rate in Azerbaijan reduced from 24 percent to the current 22 percent. At this time, the number of legal entities increased by 6 per cent in a year and the percentage of poverty in the country declined by 9 points this year, which is not a small figure. For example, poverty rate in the country declined from 29 in 2006 to 20 percent in 2007 and from 20 in 2007 to 16 percent. Number of persons engaged in entrepreneurial activity increased 6.8 percent in 2006 and totaled 339,147 entrepreneurs.  

Taxes are a balance between economic growth and social protection. As soon as it is established, the mechanism of the latter must work.

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