Failed Revolution


After the Rose Revolution, the government of Georgia makes basic changes in Tax Code for the second time.
The authors of the reform said the new Code is composed on the base of international experience and includes such approaches that will form attractive and comfortable environment for development of business and manufacture. Particularly the new step is creating institute of tax ombudsman, classification and legalization of business, new regimes of taxation and reduce of tax burden. The new tax Code will enter into the force from the 1-st January of 2011. However, the question is how basic these changes are and if it is as revolutionary Code as we were promised in the beginning of the reform.
The Parliament adopted the new Tax Code about two months ago and normative and sub-normative acts are being discussing at the Ministry of Finance of Georgia. The Minister of Finance Kakha baindurashvili: “We have not finished working on the Tax Code yet, the most interesting moment has begun: after the second day of its adoption by the Parliament business society and experts were gathered in Anaklia and formed work group in all directions. It is the first precedent when processing of sub-normative acts is going with businesspersons. This will be guarantee that the Tax Code implementation and administration will execute to reach the main goal – business liberalization. We have seen well-detailed Codes in many countries but when there is time for its implementation there derives some kind of difficulties. That is why we would like to co-operate with businesspersons to avoid such problems.”
Economic expert davit Narmania talks about the changes made in the Tax Code: “The new Tax Code is much more developed than the previous one. The first positive step is creating institute for business disputes, I mean business-ombudsman institute. It is the truth that there is only the general record in the Code about it. However, the fact that businessperson can address to the person whose administration is obliged to protect his interest is a progressive step. Working quality and success of the institute depends on two issues. The first one is regularity norms that have to be approved as normative acts in the future and the second is political will – does the authority need protection of business interest? From the one side, there is necessary need of existing legislative mechanism and from another political will of business interest protection. The second that from my point of view is one more positive step in the new Tax Code is that the numbers of regulations are written out in details, but still there are many problems in the part of administration of taxes. However, this is general estimation. For the deeper and exhaustive analysis, the important thing is the level of easiness of sub-normative acts that will be adopted by the government. Code is a principal document and real execution of it has to be regulated by orders of Finance Minister and government resolutions.”
The opinion is shared by many businesspersons – we have to look for fundamental problems of Georgia”s tax legislation through Minister”s orders and government resolutions.
Since 2004 up today, 21 of taxes have reduced to six but decrease does not mean easiness at all. The Ministry of Finance takes away more money from entrepreneurs by obscure parts in administration that they would pay in case of high taxes. Experts state constantly that there are a lot of obscure paragraphs in the tax Code that can be read with different interpretation by the officials of Revenue Service of Georgia. The main problems are not in the Code, they are hidden in sub-normative acts and in the part of administration. If comparing Georgia”s Tax Code to the international standards by volume and tax rates it meets international norms but if we do the same for sub-normative acts there is nothing left for being proud.
There are dozens of notes that these or those issues are regulated by orders of Minister of Finance or government resolutions in the Tax Code. That is and remains the main problem of our Tax Code.
The Minister of Finance has rewritten 98% of the Code and made tax allowance to small and medium business for the account of increasing tax burden for big business. Representatives of micro business having annual turnover less than 30 thousand GELs are free from taxes instead they have to be registered as entrepreneur subjects. The government officials say the goal of the change is to make micro business legal.
Rules are softening for cashbox apparatus. For the first case of not using it the Revenue Service of Georgia gives warning, for the second case entrepreneur has to pay 500 Gel fine. With current Code for the first case entrepreneur was fined by 500 Gel and for the second case the fine were 1500 Gels.
As for abolition taxes for micro business, this is the case when medal has two sides. When integrity of country”s tax area is abolished it can make negative effect on developing economic sector of the country in the long run. However, there is a positive change too. Economic expert Davit Narmania: “They are very small traders, who trade in streets, they are poor people and of course it is big advantage for them, but the fact that they will not have invoicing system there are some kind of estimation problems for customers if they need such ones. In addition, it will affect statistic sector of the country”.
One of the most important changes remains unchanged in the Code. To set upper bound for VAT payers has not done, entrepreneur has to pay VAT when his turnover is 100 000 Gels instead of promised 200 000 Gels. There were serious debates about the issue concerning taxation of real estate while discussing the Code. The minister of Finance decided to set income tax for realization of real estate if it is sold with 30 thousand Gel surpluses in accordance to its initial value in two years period. The change will cause real estate prices go up. However, the Ministry of Finance has foreseen experts advise and did not make the change.
The minister of Finance refuses the idea that big business tax burden has risen by giving tax allowances for small business. The mostly important change is that Tax Code and Custom Code became one document, this is the most important issue. Business Association of Georgia took part in discussing new Tax Code. On 12-th of October on the final meeting representatives from the Business Association mentioned that they have represented more than one hundred notes and ides and 60% of them were foreseen in the Code. The Vice-President of the Business association Giorgi Isakadze said that the Tax Code is not the ideal one yet and it needs improvement and further works.
The priorities of the new tax Code is to raise confidence in taxation system, to form stable taxation environment, maximum legalization of business, tax allowances for small business and abolish double standards in it. However, all are in regime of expectation yet. Bad and good sides of the Code will appear after the 1-st January of 2011 when the Code comes in force.