What's holding back small business growth? How will the government's tax plans affect small firms? Will businesses respond to the changes?
- A small entrepreneur will become a lone mechanic
- Business will fall below the tax radar
- Firms will start showing continuous losses
What's holding back small business growth? How will the government's tax plans affect small firms? Will businesses respond to the changes?
Timur Skoryak , a member of the board of the Kardis training center and a tax consultant, answered questions from rus.Postimees live on air.
Excerpts from the conversation :
– How will the government’s tax plans affect small businesses?
– Any increase in cost, including the increase in the cost of doing business due to an increase in the tax burden, has a negative impact on all enterprises – both large and small. However, it will have a more noticeable impact on small businesses.
The increase in turnover tax to 24% will hit small businesses hard, namely those sectors that compete with non-taxable firms.
Where you have to compete with big business, adding a turnover tax to the price will not create serious problems. It will simply be a rising tide that lifts all boats.
In cases where it is necessary to compete with private individuals who do not pay turnover tax, a taxable small entrepreneur will have to either reduce his margin ( the difference between price and cost price – editor’s note ) or artificially reduce turnover in order to move into the non-taxable zone.
– Is further growth in prices for goods and services inevitable?
– The turnover tax is not the main driver of price growth. The main stimulator of price growth in our country is the cost of labor and wages ( meaning the increase in the minimum wage – editor's note ). This is the hardest of all possible changes. Let me remind you that not so long ago the minimum wage in Estonia was below 200 euros.
– The minimum wage is currently 820 euros, this year it has grown by 10% at once. And the growth should continue in the future. The EU directive requires that the minimum wage be at least 50% of the average or 60% of the median wage…
– This will be very bad for small businesses. The cost of low-skilled assistants' labor seriously disrupts the economy of small businesses. A small entrepreneur is increasingly turning into a lone mechanic who is forced to do everything himself, including finding a client, making coffee, etc. This does not reduce his ability to work, but seriously worsens his quality of life and weakens the economy as a whole.
– What should the state fear in such a situation?
– I believe that the state is currently in a bit of a dilemma. True, a man ( Jurgen Ligi – editor’s note ) has become the finance minister, who in 2008–2009 seriously saved the Estonian economy. It was then that the growth of the minimum wage was frozen for three years, although the trade unions howled and bit. Public sector expenditures also had to be seriously cut.
– Could government measures lead to small businesses starting to evade taxes?
– Certainly. Small business has always been rather nihilistic in these matters. I think that the government's calculations to collect a certain amount through profit tax will have to be seriously adjusted in the future. We will all have to reap the fruits of this – we will get another increase in turnover tax or a new direct tax. Auto tax is one of the options for a direct tax.
– How likely is it that small businesses will go underground?
– This trend is already observed. For example, in the lower part of small business – in the beauty industry, taxi service, etc. The attitude to taxes there is conditionally theoretical, taxes are simply not declared. And our Tax and Customs Department does not really want to hunt for plankton.
In our country, it is easy to set up a company, file annual reports with zero profit, and expect to fly below the tax radar.
I think this trend will definitely increase. I think we will see hide-and-seek games in the accounting report on a large scale. Everyone will show nothing but losses.
This will mean that the state will have to revise its taxation practices or adjust its tax plans.
– What prevents small businesses from growing?
– Firstly, the political situation fundamentally hinders the growth of small businesses. We live in a country located on the short Hanseatic route from Europe to Russia. The geopolitical blockade has turned the country's main advantage into nothing.
Secondly, Estonia used to have the advantage of having inexpensive, skilled labor. This advantage is evaporating more and more every year.
Thirdly, the government has adopted a whole series of populist measures. All these crazy expenses on culture, PR, communications – it’s like buying a new tuxedo when your pocket is empty.
– What should this money be invested in?
– For starters, they didn't need to be spent. They could have saved up and, in a difficult moment, used them to buy, for example, new missile systems, instead of arranging additional levies. One could have guessed that this was important for a country that has no financial safety net and is in a zone of serious political tension.
– What situation will our small businesses find themselves in in the next year or two?
– I think that our small business will survive. We will not turn into a country, like our large aggressive neighbor, where all business is under the oligarchs.
And although small business is extremely resilient, it will have very serious problems. One of them is the diversification of large businesses, which will begin to climb into the pasture of small business. On the other hand, small business has the prospect of becoming shallow, since the opportunity to use cheap labor disappears.
By happily increasing the minimum wage, the government will get a number of unemployed or impoverished pensioners, since now a number of jobs in small businesses are occupied by pensioners who agree to work for a small salary. In the future, small businesses will not stand still to pay them.
More details in the replay!
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Postimees Studio: What's Hindering the Growth of Small Businesses? / Presenter's Clothing: Tallinna Kaubamaja / Boss Photo: Oliver Kaur
- What changes are the hardest for small firms?
- Is raising the minimum wage a feasible task?
- What's holding back small business growth?
- Will business go into the shadow economy?
- How will income tax affect investments?
- Is your business at risk?
- Is it possible to avoid a wave of small business closures?
- Will the government's measures help achieve the stated goals?
Presenter's clothes: Tallinna Kaubamaja / Boss
