Who benefits from the simplified 6% VAT regime? A calculation for two businesses

Hamid aka, who owns a teahouse, and Nodira, who owns an electronics shop, asked the same question: "Should we switch to the 6% regime under Decree PF-100?" The answer is not the same for both. The reason is simple: 6% is lower, but in exchange you give up one important right.

What is the difference between the two regimes?

Decree PF-100 (as amended by Decree PF-175) gave businesses in trade, catering and services the right to choose a simplified VAT regime.

So two questions have to be weighed together: how much money does the right to credit input VAT save you, and how much does the exemption from corporate profit tax give you? Below we first calculate only the VAT part, then add corporate profit tax.

The calculation for Hamid aka and Nodira

The calculation is based on the following assumptions (amounts for one month, hypothetical): - under both regimes, sales (excluding VAT) are the same and VAT is charged on top of that amount; check the exact procedure for determining the tax base in the current versions of the Decree and the Tax Code - under the general regime, VAT on purchases from VAT payers is credited in full - corporate profit tax is not taken into account at this stage: it is considered separately in the next section

• Monthly sales of both: 200 000 000 soum
• The "Lazzat" teahouse buys products worth 40 000 000 soum a month from VAT payers (the rest from the bazaar, without VAT)
• The "Tezkor Elektronika" shop buys goods worth 160 000 000 soum a month from a distributor that is a VAT payer

On VAT, the teahouse wins: its input VAT is small, so it has little to lose. The shop loses on VAT: it buys almost all its goods with VAT, and giving up the right to credit 19.2 million soum costs it dearly. But this is not yet the final answer, because corporate profit tax has not been taken into account.

Where is the break-even point?

Let us find the situation in which VAT is equal under both regimes. Let sales be S and purchases from VAT payers be X (both excluding VAT):

12% × (S − X) = 6% × S, hence X = S ÷ 2.

That is, (under the assumptions above) if purchases made with VAT are less than half of sales, the 6% regime is cheaper on VAT alone. If they are more than half, the general regime is cheaper on VAT alone. With sales of 200 million, the threshold is 100 million: then both regimes give 12 million soum.

How does corporate profit tax change the calculation?

Under the simplified regime, corporate profit tax is 0%, while under the general regime corporate profit tax is paid under the general procedure established by the Tax Code. Therefore: - For Hamid aka, both factors work in the same direction: VAT falls and no corporate profit tax is paid. For him, the 6% regime is clearly beneficial - For Nodira, the factors pull in opposite directions: she pays 7.2 million soum more VAT a month, but is exempt from corporate profit tax. Her question is: is the corporate profit tax payable under the general regime for the same period greater than the extra VAT? If it is greater, the 6% regime is beneficial for her too; if it is smaller, the general regime is cheaper

So the "X = S ÷ 2" rule answers only the VAT part. Make the final decision by calculating VAT and corporate profit tax together, taking the current rate from the Tax Code.

What changes in the accounting?

Suppose the teahouse bought products worth 40 million with 4.8 million soum of VAT.

Under the 6% regime, input VAT is not credited, so under paragraph 15 of NAS No. 4 it is added to the cost of the products. As a result, the cost increases by 4.8 million soum.