CODE OF ENTREPRENEURS – POLICY OR ECONOMY?

SOPHICO SICHINAVA

It is difficult to say how many amendments have been made to the Tax Code since 1997. However, these amendments failed to improve the state of taxpayers and mobilisation scheme of budget funds.

Neither of them has fulfilled any of the functions. Many amendments were motivated by the wish to put out fiscal fire and receive temporary effect. There has been much discussion around the Tax Code during all this time. The heavy tax burden compelled legal business to go over to shade sector. According to the data of the Tax Revenue Ministry, we will not exaggerate by saying there were 50 thousand taxpayers in 1998 and 18 100 in 2001 while in 2002 the figure dropped to 12 thousand.
The Parliament passed the Tax Code called “Code of Entrepreneurs” after the second hearing, but discussions around the Code have not abated till present. The alternative Code has opponents, too. They assert that base of tax revenues in Georgia will become less after passing of the tax revenues base . The Code has recently been considered at the initiative of the Commerce House of Georgia. Niko Orvelashvili, one of the authors of the new Tax Code, speaks about its main principles:
– The system should be simplified maximally, and taxes should be endurable. I do not mean acceptable, but endurable. Taxpayer is not protected today. I do not mean taxpayers that have influential protectors. A taxpayer should have legal means for protection.
The present Tax Code makes you appeal to the chief in case you were damaged by an inspector, then to his chief, etc. All of them will, finally, send you away. You will have to go to administration. As to what will happen there, it is a separate topic for conversation.
The third principal part is equality and principle of partnership. We form state structures for protecting our rights. Thus, as the state is a product of agreement and consensus and as we elect the Parliament and other elective agencies for forming administrative structures and agencies so that the latter could, in their turn, fulfil their functions, we should also agree to it that they need financial provision. What does the so-called preamble of the project come from? The Code begins as follows: “The aim of the present Code is financial provision of official authorities for enabling them to perform their constitutional responsibilities, but without the breach of civil rights and freedom”. It is another principle. The present Code completely ignores rights and freedom of person while any article of the submitted project is full of respect towards the rights.
After we have reached agreement on these principles, we made revision of the existing system and saw “wonderful” taxes that bring 22 thousand lari, 40 thousand lari, 70 thousand lari to the budget. I am sure their administration costs more than income derived from them. After the critical consideration, we abandoned the taxes and determined the list of taxes that had the right for existence. This right does not belong to taxes meant for receiving short-term fiscal effect and impeding the long-term perspective development of economy, thus leading to deformation processes. This right does not also belong to taxes that are ineffective for business. Their fiscal effect is insignificant and they bring much discomfort. After the critical consideration we decided that VAT should be preserved as it is a general tax in our model (in fact, it represents tax on consumption). Therefore, there should be no exclusions except in cases of emergency recognised in the world practice. As for income tax of natural persons and companies, a significant revision was made in this direction. One of the opponents said that profit tax has been abolished. In reality, terms were adjusted in accordance with international financial standards of audit accountancy as well as with primordial Georgian terms accepted in legislative acts. Therefore, income is interpreted as profit in accordance with international standards. Thus, profit tax was not abolished, but renamed into income tax of legal entities; excise being a specific tax remains in force; there will be significant changes in groups of property taxes where land is singled out in the first place. Land is interpreted not as an agricultural plot where agricultural production is grown. Land is a spacious substance where a person might have a kitchen garden or a commercial shop, etc. Principles of the Roman Law seem to be continued as the Roman Law views land as organic whole. Thus, the system has become more complex.
Then there comes tax on the profit of enterprises as well as profit tax of natural persons. In this case it is housing stock and property subject to compulsory registration – vehicles, flying machines, ships, etc.
Let us go back to VAT. What results are produced by chargeable system? In fact, none, except strengthening of corruption machine. After the passage of the law on control over entrepreneurial business, we allegedly could defend taxpayers. However, as a result of it, judges have also got involved in the roundelay of corruption as they could not manage to eradicate facts of manipulation with commonly known VAT.
Zurab Nogaideli: “Four general national taxes as well as three local taxes included in property tax will be preserved in accordance with the offered project. There will be 10-15 % regime for income tax of natural persons – regime of family and individual taxation with or without deductions. The income rate of legal entities will be 15% instead of the present 20%, but we should also mention that benefits are abolished. Social tax will also be abolished and we will have private pension insurance in accordance with the offered model. The government has not yet given due consideration to the project of new Tax Code when the Parliament passed the project of compulsory social insurance offered during the first hearing. We can not yet assert that we have private pension insurance when the Parliament passes compulsory social insurance law during the first hearing.
According to the elementary calculations, tax base will decrease from 26% of GDP to 16-17%. We should also take ito consideration the fact that in 2003 mobilisation of budget tax revenues is planned on 15,8% level of GDP. According to the poverty reduction programme that we hope indicative plan will be based on in the future, this index will reach 20% by 2015-2017. This will be impossible as after the enactment of the project the absurd tax base will cease its existence. Given the present potentials of tax administration, the potential level will not grow sharply after the enactment of the project. No one will manage to replace the 4 500 thousand army of tax inspectors. The mobilisation level of tax revenues will decrease by 9% in the course of 2-3 years. For instance, budget tax revenues will make up 880-900 million GEL in 2003. Therefore, during the consideration of this project there arises one question: what responsibilities does the budget declaim after the decrease of revenues? We do not have any right to say that VAT will decrease from 20% to 15%, but budget revenues will remain the same because of the sudden improvement of administration level. Tax burden will become easier for large business, but not for middle and small one. I spoke to representatives of large business. They are content with this project because they have to pay less. We are not interested in other sides of the project.
The project implies equal distribution of tax burden among large and small businesses. We think, it is unacceptable. It should be distributed among them non-proportionally.