HOW TO TRANSFER ECONOMY IN ILLEGAL SPHERE? NEW VARIATION OF TAX CODE

BY. Sophico Sichinava

A new season of fiscal fire extinction is starting in Georgia. Again we adopt to new changes the ideology of which is “whip without sugar”. We believe that administration and an iron hand will solve the problem of budget deficit.

The keynote of tax changes is much important for a legal sector of business, but in this case it only threatens its perspectives. What are these changes? The first is tightening of cash register. The second is decupling of ratings and sanctions. Let us be frank and say whom these tightened sanctions are applied to. It is necessary to make a conditional business map of Georgia with this purpose.
This map will not include Abkhazia, Osetya and partly, Achara. Business activity in Guria, Megrelia, Samtskhe-Javakheti and Kaheti is postponed almost equalling to zero not to say anything about Racha and Zemo Imereti. Business map of Georgia covers corridor in the direction of Tbilisi-Kutaisi where some business is still preserved in Vake-Saburtalo and Mtatsminda-Krtsanisi destricts. As far as Isani-Didube and Gldani are concerned, the situation here is managed by markets. There are a lot of the so-called commercial booths near a small number of legal business objects in the same Saburtalo and Chavchavadze avenue that have an unobstructed trade. There is the same situation here as in the markets. How do authors of the Tax Code intend to install cash registers and ratings for them? There are about 100 legal entities in Tbilisi in reality. These measures are aimed against them. This will serve to put them in a more unequal position as compared with illegal business. As a result of it, we will see that these units will also go over to illegal sector. I would be glad to believe that these amendments would increase budget revenues. However, both our expert Gela Khanishvili and we do not see any perspective of the increase of tax base. Yet, blessed are believers. We understand authors of the policy, too. They will be required to seriously increase budget revenues in the slumped economy with no branch of power giving any thought to economic reforms and creation of healthy business environment.
– Generally speaking, the amendments to the Tax Code could be described as negative. It does not only weaken the negative elements in administration, but rather strengthens them. The difference of the Tax Code of 1997 and the law that has been in force till then is that an entrepreneur’s administration is not a tax function, but that this function, to a certain extent, will be put on a conscientious entrepreneur. Proceeding from the general practice, if an entrepreneur is a conscientious VAT payer, he has to either hide the tax (because you will hardly buy a production with VAT) or pay taxes that were hidden by someone else. Tax agencies are not obliged to make them answerable for the breaches, a decent taxpayer is asked to execute administration for all entrepreneurs. That is why norms of the Tax Code have become so unacceptable for so many years with there being many negative elements in VAT and Code. Entrepreneur’s function does not include administration. The second entrepreneur has made use of it, but practice of VAT registration and fictitious VAT invoices are common knowledge. It only served to strengthen its vicious elementsinstead of weakening it. The clearest example of it are relationships between the centre and Achara. The VAT in Achara ranges from 29-30 millions. Dishonest entrepreneurs in the centre try to return to the budget under the veil of value added tariff. The Code gives them this possibility. Any amendment to the document should provide for such norms that would maximally free entrepreneurs of administration so that they would be responsible for their own particular actions; tax agencies should be given functions that they should have in reality. The amendments strengthen negative elements. Where before a negative tendency was observable in value added tariffs, now it is added by natural person’s income tax.
– Under the present law, a conscientious entrepreneur should submit a report about people employed for the performance of particular jobs to make it possible for the Revenue Service to collect income taxes, but a state does not want or cannot do so. Perhaps, it cannot afford to. The state offers the entrepreneur to levy this tax.
– The financial development of the country and business turned into an abstract notion. We speak about the Tax Code from the viewpoint of tax collectors, i.e. from the viewpoint of tax collector’s problems and his views about solving it. The Tax Code is not a document that would become a lever of tax administration. Nowadays, an administrative fine is imposed on cash register. Under the amendment, it is financial and is included in a tax areal. On the one hand, it increases budget revenues, but on the other hand, the subject of cash register is absolutely disorganised in an integral number of structures. Will this amendment to the Tax Code solve this problem? It will hardly do so. The issue of cash register does not require much discussion. I know that we are still far from the example of Chicago. I was very surprised to see that in Chicago airport a shoeblack had a cash register. After talking to him I learned that his cash register was connected to the central Revenue Service. Thus, the Revenue Service directly received information about how many shoes he cleaned.
This document has many positive elements requiring clarification, change and tightening, but in spite of all the Tax Code should not be considered an amount of tax rate. If we want the state to use effectively land, you will, probably, have to impose a high tax on it. Those who will be able to gain more profit from it should work on the land. There is an impression as if we need no tax on land and factory. There are many large-scale communist period factories in Tbilisi. They occupy much space. Yet they should not be tax exempt. On the one hand, it seems logical: a factory has a great territory and cannot pay taxes, but, on the other hand, the state should care about an effective use of land. One cannot judge about land taxes from the viewpoint of one’s ability to pay taxes. There should be such a business in the country that would be able to pay all kinds of taxes. It is not the way with us. We want to have low taxes because we cannot pay them.
A smuggler pays all taxes: in fact, he pays taxes to all state structures ranging from the customs and law enforcement agencies, but he does not pay taxes to the state. When speaking about handicaps in the development of business, we come to the conclusion that the problem lies in state taxes. If we follow the strategy, amendments to the Code will deteriorate tax-payers’ state still more, which will encourage development of illegal business.
There are cases when grandiose transactions take place, but the state has many mechanisms and structures for discovering and eliminating these crimes. However, we must choose a course that will deteriorate the state of conscientious and legal businessmen. Still we will not be able to make dishonest businessmen pay taxes. These amendments contain such steps backward as imposition of fixed tax on baker’s shops. There is one element here implying that a fixed tax and VAT would allegedly serve to legalise flour, but we cannot take decisions that are economically inexpedient. We may think that this helps to achieve something, but if administrative organs make transactions, why should not they do the same tomorrow? In fact, we have stopped a serious mill plant.In fact, we do not already discuss medical norms and people’s health. We have forgotten these issues. Every effort is made to make 150 laris from where one received 100. No one discusses and remembers the way these amounts affect people’s health. Nor anyone remembers economic sabotage acts of other countries. Today, a conscientious businessman still manages to receive some profit from his business, but after these amendments the situation will change for the worse.
We build market economy with a phenomenon of a rich man and liberal policy, but liberalism does not mean absence of any limits. No administrative note in the Code, no fines and sanctions mean that they should be implemented. I can understand that rating and accounts are necessary, but I remember a very interesting dispute with a representative of Revenue Service about the priorities of repaying money, i.e. about repaying tax liabilities and not issuing, f.e., wages and pensions. This amendment has still been made to the Code, but I do not see its effect, though I am sure that it was profitable to many dishonest businessmen.
– Do these amendments count on it?
– Any article in the Tax Code can be used for evil purposes, but the matter does not concern this only. An approach about the partnership of entrepreneur and state must be formed. A deposit tool is presented in these documents where a state has a priority over business structures. Why?
– What can be better than a state entrepreneur? There is nothing similar in our Constitution. Instead, it propagates justice and settlement of disputes by means of legal procedures. At the same time, the Tax Code says that if an organisation has a 1 million dollars’ asset and it owes a debt to both the state and other enterprise, by some strange reason the debt belongs to the state. The state and authors of these amendments do not only indirectly suppress loss-making business on behalf of the state, but also everything connected with it. Today there is no structure in Georgia that would not discuss policy. When tax agencies prepare amendments, they raise an issue from the viewpoint of their problems. The Tax Code is a document with macroeconomic vision. There is no structure or link in the Finance ministry that would develop this vision. The Finance Ministry has lost its main function and fell to the level of book-keeping clearing out whether the treasury received 100 or 150 laris. The document is an adequate reflection of the one who prepared it. Amendments to the Code might produce short-term effects, but this document does not reflect things envisaged by a strategy of construction and recovery of state.
– This strategy must be taken in the result of positive discussion and comparison. We seem to know everything, but we never have time; there are constant problems in the budget and lack of funds. Meanwhile, six years passed.
– We listen to the second conception where we, in fact, face a contradictory phenomenon. A state is ignored here, entrepreneur’s interests move to the foreground as if an entrepreneur is not a part of state with which it works in a single scheme, as if an entrepreneur’s success is not a success of the state.
– If a state official committed a crime and made a wrong contract with an entrepreneur, the budget pays twice as much. The great scales of corruption can hardly be imaginable. Can you imagine an ideal entrepreneur and bad state or vice versa? Moreover, it is difficult to make out who is an entrepreneur and state official. State official’s work is not well-paid so an official has to become engaged in business.
Look at the way a state treated one of its departments – the ministry of Income and its experienced staff. Have you ever heard a state worrying about his minister who lost a job? What do former ministers do? Is anybody interested in their knowledge and experience? How can one destroy economy and leave staff unemployed by means of foolish slogans such as struggle with corruption? I do not lay any claims to Zurab Nogaideli, but it is an illusion to think that there were any changes in the Finance Ministry. The matter is that funds came and went. A certain collaborator and a simple accountant managed it in the ministry. Marian Gogishvili will have to build the Finance Ministry again. The best years of economic recovery are lost. If amendments to the Tax Code went in a right course, they would not make it possible for the real business to reach the level of dictating tax incomes. Today, illegal business is stronger than ever. The terrible thing here is that real business possesses a substantial capital, and it will try to use this capital for the protection of its interests. From the viewpoint of tax policy, it is necessary to form such levers and mechanisms that would give the state a chance to weaken illegal business as war will not produce any results. Our approach means a great burden for conscientious businessmen. As a matter of fact, the Code is not used nowadays. No one can say what the economy would be if the Code worked. Unfortunately, the positive elements of the Code amendments can become absorbed by negative ones, which will make the Code unacceptable to anybody.
– Can you say what amendments were made?
– If we are not able to change the notorious subject of taxes, we should introduce a mechanism that would mark a special production with a brand. It will, to a certain extent, be a step forward. Yet, in general it contradicts the principle of the development of market economy, but if it is implemented in a right way, it might be used as an intermediate element. The matter is that it is necessary to settle problems of the taxation of auto transport; some of the elements should be transparent. However, these amendments are, eventually, not so serious and important for the Code. There are changes concerning grants. It is necessary to decrease and weaken elements that can be manipulated. In fact, grants are a good subject, but, on the other one, they cannot be used for the increase of budget revenues. Budget revenues increase if they are used in a right way. When you read press, you wonder at how people can think so, but you resent when this way of thinking reaches the Code. One receives the impression that grant is a bad thing and that it should be taxed. Grant is given to you for the development of this or that element of national economy – it can be transferred directly to the budget, but you are told that the budget is not planned in a right way. Your budget has other guidelines and therefore, the resource is absorbed in the scale of the country.