Taxation system reform in Georgia

Rusudan Papaskiri Assistant-Professor of Sokhumi Independent University

Impose of taxes influences decisions of economic agents and their stimuli – to produce and consume.

In the end of 2003, effectiveness of taxation system of Georgia was minimal. The main reasons of this were:
1. Complicity of tax legislation. Tax system was regulated by three different laws, (Tax code of Georgia, Law on “customs rates and taxes” and law on “road fund”) that were regulating the rules of calculating separate tax in different ways. There were 22 taxes imposed and at the same time, almost all taxes were differentiated. This created problems in definition of tax liabilities. Payer was induced to make a deal with employees of taxation organ in order to avoid problems in the future. At the same time, there was a good environment for dishonest taxpayers. The number of custom duty rates was 22, while identical goods were taxed with different rate. The mentioned problem was sharpened by the corruption existing in taxation organs.
Imposed taxes on objects quite often were duplicated. For instance, the taxable objects for entrepreneurial activities and using of public roads and taxable objects for value added tax were identical. The aim of imposing these taxes was to provide local organs and road fund with independent source of income.
1. Instruments of inadequate administering. Despite great number of taxes (22 taxes) and correspondingly wide range of taxation basis, tax incomes made up only 14% of GDP, while according to various assessments potential taxation base should have been at least 35% of GDP. or the level of administering was 40%.
Administering was Achilles’ heel of tax system together with imperfection of legislative base.
By the end of 2003, structure of tax organs was quite complicated and ineffective system. Rights and obligations were duplicated and scattered in various organs. There were several organs of tax administering that were responsible for administration of the taxes: Tax department, Custom department and Roads Department. There was no coordination between these institutions;
The function of fighting against financial crime was distributed and duplicated in three institutions: Ministries of Internal Affairs, Security and Finances. This meant full absence of responsibility and additional burden for the taxpayers.
2. Corruption in the tax organs. Instruments of wide range of corruptive dealing were implemented under the conditions of using fallacious methods of tax collection. Creation of assets by means of so-called “non-commodity operations” was wide spread. Fictitious firm was registered as a taxpayer of VAT; it was purchasing some goods and selling them at considerably high price to already selected company that was exporting these goods. Quite often the goods were fictitious too and no payment was taking place. The result of this operation was that fictitious company had the VAT liabilities, while exporter company had excess of VAT payment. It is notable that mentioned excess was compensated by means of documentary stamps. Tax organ was issuing a certificate on excess of taxes, and on this basis Service of Documentary stamps was issuing documentary stamps.
Considering the above mentioned problems, the tasks of the tax system reform in 2004 were:
1. Amendment of legislative base and its improvement;
2. Adequate institutional arrangement;
3. Implementation of efficient system of human resources management;
4. Modernization of infrastructure;
One of the most important components of tax system is a legislation that manages imposition of taxes and rules of administration.
1. New tax code became operative from January 2005. It implied following amendments:
Income Tax – Before 1 January 2005, income tax rate was progressive and differentiated. After the amendments made in the code, unified 12% rate was imposed. This was 16% less than existing effective rate and it simplified the calculation, declaration and administration procedures.
Profit tax – Considerable changes were made in the structure of profit tax. Groups of main assets to be amortized were refined and the regulations of amortization were specified.
Rules of accounting has been adjusted and come into compliance with international standards of accounting (ISA). For instance, according to existing rules, definitions of Bad Debts and doubtful debts were confused. According to tax code, doubtful debts were deducted; the definition of doubtful debts in Georgian tax code was actually identical to the definition of Bad Debts in ISA that created considerable confusions in the accounting.
Value added tax – new tax code decreased the VAT rate from 20% to 18%.
Despite the fact that in ideal case, VAT should be levied upon every taxpayer, great number of VAT payers complicated the process of administering and gave more opportunities to evade taxes. Therefore, it has become a customary to impose a limit that exempts small enterprises from VAT, correspondingly from declaration. As a result, administration is able to concentrate on major taxpayers. Coming out from the abovementioned, GEL 100 thousand limit of originating an obligation of registering as a VAT payer has been established. The limit has been defined on the basis of analyzing the number of VAT payers and actually paid sum of the tax.
The aim of imposing excise duty is a gaining of additional income and/or reduction of the consumption of separate commodity. Alcoholic beverages (import or supply), oil products (import or supply), tobacco products (import or supply) and passenger cars (import) and scrap-iron (export) were defined as the excised goods. Excise duty hasn’t been imposed on luxury goods due to its law fiscal effect and complicated administration.
Social tax – from 1 January of 2005, social tax rate paid by an employer (including physical body involved in economic activities) has decreased from 31% to 20%. At the same time, social tax rate of 2% paid from incomes of physical bodies (employed) has been abolished.
Custom duty – from 1 January of 2005, rate of custom duty has been reduced from 22% to 16%, while average weighted rate has been decreased by 2% (from 11% to 9%).
Property tax, land tax and vehicle tax has been united and established as one property tax.
Systematization and refinement of general regulation of taxation has been accomplished. Some of them are of special importance:
Fine rate has been decreased from 0.25% to 0.07%;
The terms of declaration and payment of the taxes have been decreased and harmonized;
Rights of the taxpayers have been broadened and three-stage system of appealing has been implemented in the Ministry of Finances.
1. From 1 September of 2006, the number of custom duty rates has been reduced to three (0%, 5%, 12%); at the same time international trade liberalization has been established. 0% rate of custom duty has been levied upon all the goods, except construction materials and agricultural products. As a result, taxable base has been reduced by 90% that implied abolition of custom duty for 90% of goods defined by stock list;
2. Gambling business tax has been abolished from 1 January of 2007 and it has been replaced by a gambling business duty.
Custom duty has been reflected in tax code and thus the process of unifying all the taxes in one legislative act has been completed. This step was of considerable importance, as the rules of administering of all the taxes have been unified.
Following taxes became operative from 1 January of 2007:
New customs code became operative in 1 January of 2007.
The structure of customs code is harmonized with the legislation of European Union, the issues of appealing and infringement (responsibility) of customs law.
1. New amendments became operative from 1 January of 2008:
From January of 2008, profit tax has been decreased to 15% that means additional financial resources left in an economy by the investors.
Social and income taxes has been unified, this unified tax has been reflected in the base of income tax, while the rate has been established in amount of 25%. In this way, the rules of accounting and declaration, the taxable base of taxes imposed on salaries has been unified. At the same time, tax burden has been decreased by 1.2%.
Following taxes became operative from 1 January of 2008:
Nowadays, Georgian tax system is the most liberal, simple and transparent system in comparison with other countries of the region. At the same time, Georgian tax legislation took the tendency of stability and constant liberalization that is playing important role in decisions of the investors.
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