IMF How To Notes

How to Design a Presumptive Income Tax for Micro and Small Enterprises

Author/Editor:

Jean-François Wen

Publication Date:

June 29, 2023

Electronic Access:

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Summary:

Turnover taxes are prevalent in developing countries as a simple form of presumptive taxation of business income. Such simplified tax regimes can reduce the relatively high compliance costs of micro and small enterprises, which might otherwise discourage entrepreneurs from formalizing their activities and paying taxes. The note addresses design issues for a turnover tax regime—which taxes it replaces, what the criteria are for eligibility, how to determine the optimal threshold, and how to set the tax rate. A key observation is that, although low turnover tax rates may incite larger firms to artificially reduce their sales, the rate should also not be so high as to discourage formalization of activities. A table of tax rates and turnover thresholds observed internationally is provided. The note concludes by suggesting analytical steps to guide practitioners in designing turnover tax regimes.

Series:

How-To Note No 2023/002

Subject:

Corporate income tax Economic sectors Effective tax rate Financial crises Income and capital gains taxes Income tax systems Sales tax Tax policy Taxes

Frequency:

occasional