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Do you want to pay the tax at 2% or 20%? - Explanation
Do you want to pay the tax at 2% or 20%? - Explanation
The numerous changes made to the Tax Code have created a demand to better familiarize the population and taxpayers with the new rules. Taking this into account, AZE Finance.az continues its activities to explain tax legislation and simplify its communication to the public.
Which tax is more beneficial—2% or 20%?
One of the most interesting and important innovations this time to the Code has been the new requirements regarding simplified tax payers. According to these requirements, some taxpayers who were previously under the simplified tax regime must now become income tax payers and pay taxes at a rate of 20%.
Who will be affected by these changes? What needs to be done to pay taxes at a more beneficial rate?
Expert Rauf Qarayev presents a simple explanation for these questions.
Note – think about who you are selling to...
The situation can be explained simply as follows:
If you are selling a product, such as milk, to the public – you become a simplified tax payer. If you sell that same milk to a market, you become an income tax payer.
In other words, if you want a 2% tax to be deducted from your income, sell the goods to the public at the market; if you want a 20% tax deduction, sell the goods to the market.
But how can the market pay a 2% tax instead of 20%?
An easy way to do this is by selling goods in two ways in retail outlets (markets).
In markets, goods are sold with a cash register and POS-terminal. During the sale of goods in these outlets, a receipt is provided to the buyer from the cash register.
At the request of legal and natural persons engaged in entrepreneurial activity, an electronic invoice or electronic tax invoice is issued.
According to the Tax Code, individuals who are not registered for VAT purposes and whose taxable transactions volume in any month of a consecutive 12-month period is 200,000 manat or less may be simplified tax payers. In simple terms, markets that sell goods in retail should only serve the public (individuals not registered for tax purposes) to be eligible for the 2% rate.
What if the market sells goods wholesale? In this case, they cannot be a simplified tax payer. If their income is below 200,000 manat, they will only need to pay income tax or profit tax (in both cases at 20%). If their income exceeds 200,000 manat, an additional 18% VAT will also apply on top of the 20%.
Example: A person earns 700 manat per month from selling milk at the market: According to the Cabinet's decision, they are considered a micro-enterpreneur. A person with 1-10 employees and an income of 0-200,000 manat is considered a micro-entrepreneur. In this case, they must pay income tax at 2%, which is 700*2% = 14 manat.
If selling milk to a market, then they become an income tax payer.
Example: A person, based on article 218.5.10 of the Tax Code, cannot be a simplified tax payer because they provide services to a market. Since they are a person selling milk at the market, they will pay income tax at a rate of 20%. However, since they meet the criteria for a micro-entrepreneur, according to the Tax Code, they will be granted a 75% discount (Article 105.1.18). Let's continue with the example. The person earned 700 manat from milk. They have 100 manat in expenses under Article 108 of the Tax Code. So, 700-100 = 600 manat, and 75% discount is applied, which is 450 manat. After discount, 600-450 = 150 manat * 20% (income tax rate) = 30 manat income tax must be paid.
How can the market pay a 2% tax instead of 20%? An easy way is for retail businesses (outlets) to sell goods using a cash register and POS-terminal. In these outlets, when selling goods, the buyer (consumer) will receive a receipt from the cash register (legal and natural persons engaged in business activities may request an electronic invoice or electronic tax invoice). Individuals who are not registered for VAT purposes and whose taxable transactions in any month of a consecutive 12-month period do not exceed 200,000 manat can be simplified tax payers and can operate as such.
Simply put, markets selling goods in retail should only serve the public (individuals not registered for tax purposes) to be eligible for the 2% rate.
Example: A market selling goods in retail to the public sells 30,000 manat worth of goods in a month. This is done using a cash register and POS-terminal. In this case, the simplified tax paid would be 30,000 * 2% = 600 manat.
What if the market sells goods wholesale?
According to the Tax Code, a market selling goods wholesale cannot be a simplified tax payer (Article 218.5.10). They must either sell goods wholesale or retail. Both cannot be done simultaneously.
When the entity is an individual, they are considered income tax payers, and when it is a legal entity, they are considered profit tax payers. Both have a tax rate of 20%. Since the market is a legal entity, 20% profit tax will be withheld.
Example: If the market earns 20,000 manat per month, then it will pay 20,000 * 20% = 4,000 manat profit tax.
Example: If the market earns 300,000 manat per month, since their income exceeds 200,000 manat, they will also be subject to VAT. Therefore, the market will pay both profit tax (20%) and VAT (18%).
300,000 * 20% = 60,000 manat profit tax
(300,000/118) * 18 = 45,763 manat VAT will be paid.
In total, the market will pay 45,763 + 60,000 = 105,763 manat in taxes.
The numerous changes made to the Tax Code have created a demand to better familiarize the population and taxpayers with the new rules. Taking this into account, AZE Finance.az continues its activities to explain tax legislation and simplify its communication to the public.
Which tax is more beneficial—2% or 20%?
One of the most interesting and important innovations this time to the Code has been the new requirements regarding simplified tax payers. According to these requirements, some taxpayers who were previously under the simplified tax regime must now become income tax payers and pay taxes at a rate of 20%.
Who will be affected by these changes? What needs to be done to pay taxes at a more beneficial rate?
Expert Rauf Qarayev presents a simple explanation for these questions.
Note – think about who you are selling to...
The situation can be explained simply as follows:
If you are selling a product, such as milk, to the public – you become a simplified tax payer. If you sell that same milk to a market, you become an income tax payer.
In other words, if you want a 2% tax to be deducted from your income, sell the goods to the public at the market; if you want a 20% tax deduction, sell the goods to the market.
But how can the market pay a 2% tax instead of 20%?
An easy way to do this is by selling goods in two ways in retail outlets (markets).
In markets, goods are sold with a cash register and POS-terminal. During the sale of goods in these outlets, a receipt is provided to the buyer from the cash register.
At the request of legal and natural persons engaged in entrepreneurial activity, an electronic invoice or electronic tax invoice is issued.
According to the Tax Code, individuals who are not registered for VAT purposes and whose taxable transactions volume in any month of a consecutive 12-month period is 200,000 manat or less may be simplified tax payers. In simple terms, markets that sell goods in retail should only serve the public (individuals not registered for tax purposes) to be eligible for the 2% rate.
What if the market sells goods wholesale? In this case, they cannot be a simplified tax payer. If their income is below 200,000 manat, they will only need to pay income tax or profit tax (in both cases at 20%). If their income exceeds 200,000 manat, an additional 18% VAT will also apply on top of the 20%.
Example: A person earns 700 manat per month from selling milk at the market: According to the Cabinet's decision, they are considered a micro-enterpreneur. A person with 1-10 employees and an income of 0-200,000 manat is considered a micro-entrepreneur. In this case, they must pay income tax at 2%, which is 700*2% = 14 manat.
If selling milk to a market, then they become an income tax payer.
Example: A person, based on article 218.5.10 of the Tax Code, cannot be a simplified tax payer because they provide services to a market. Since they are a person selling milk at the market, they will pay income tax at a rate of 20%. However, since they meet the criteria for a micro-entrepreneur, according to the Tax Code, they will be granted a 75% discount (Article 105.1.18). Let's continue with the example. The person earned 700 manat from milk. They have 100 manat in expenses under Article 108 of the Tax Code. So, 700-100 = 600 manat, and 75% discount is applied, which is 450 manat. After discount, 600-450 = 150 manat * 20% (income tax rate) = 30 manat income tax must be paid.
How can the market pay a 2% tax instead of 20%? An easy way is for retail businesses (outlets) to sell goods using a cash register and POS-terminal. In these outlets, when selling goods, the buyer (consumer) will receive a receipt from the cash register (legal and natural persons engaged in business activities may request an electronic invoice or electronic tax invoice). Individuals who are not registered for VAT purposes and whose taxable transactions in any month of a consecutive 12-month period do not exceed 200,000 manat can be simplified tax payers and can operate as such.
Simply put, markets selling goods in retail should only serve the public (individuals not registered for tax purposes) to be eligible for the 2% rate.
Example: A market selling goods in retail to the public sells 30,000 manat worth of goods in a month. This is done using a cash register and POS-terminal. In this case, the simplified tax paid would be 30,000 * 2% = 600 manat.
What if the market sells goods wholesale?
According to the Tax Code, a market selling goods wholesale cannot be a simplified tax payer (Article 218.5.10). They must either sell goods wholesale or retail. Both cannot be done simultaneously.
When the entity is an individual, they are considered income tax payers, and when it is a legal entity, they are considered profit tax payers. Both have a tax rate of 20%. Since the market is a legal entity, 20% profit tax will be withheld.
Example: If the market earns 20,000 manat per month, then it will pay 20,000 * 20% = 4,000 manat profit tax.
Example: If the market earns 300,000 manat per month, since their income exceeds 200,000 manat, they will also be subject to VAT. Therefore, the market will pay both profit tax (20%) and VAT (18%).
300,000 * 20% = 60,000 manat profit tax
(300,000/118) * 18 = 45,763 manat VAT will be paid.
In total, the market will pay 45,763 + 60,000 = 105,763 manat in taxes.