TAX PREFERENCES AND DIRECTIONS OF USING THEM

KHATUNA SHALAMBERIDZE

Georgian tax system is not yet well organised with a difficult and contradictory process of perfection going on.

It is noteworthy that no country has a tax system that would be equally acceptable for both a government and taxpayers. At the same time, each country faces different tasks on a certain stage of development, and the economic potential changes. The current tax system will be confronted with social demand and, therefore, new tasks. No country has an unchangeable and permanent tax system.
At the same time, dynamics of tax system does not rule out the task of balancing principle functions. National governments have made all efforts towards balancing the fiscal and stimulating (economic) functions of taxes as, on the one hand, a country realises budget tasks by means of levying tax revenues and, on the other one, it accelerates development rates of economy and especially, its priority branches via taxes.
Discussions about the Georgian tax system in transition period, mainly, touch upon correlation problems of fiscal and stimulating functions of taxes.
Besides, discussions concern simplification of tax legislature, reduction of tax rates and distribution of tax burden for consumption, entrepreneurs and capital. Unfortunately, among the two above-mentioned principal functions such directions of optimal correlation as use of tax benefits has been but little studied in economic literature. From this point of view, it is advisable to minimise tax benefits. We share the opinion that legal benefits can not be viewed as losses as they stimulate production, innovation process, investment growth, economic activity as well as solution of social problems, social protection of disabled people, etc.
Tax benefits are one of important components of tax policy. Yet, despite their ever-wider use in taxation practice, no well-defined approach has been developed for explaining their content. This is testified by the fact that classification of tax benefits has not been developed to date. Moreover, their place, role and directions have not been formed in the practical realisation of modern tax reforms. The experience of developed market economies shows that tax benefits have simultaneously fulfilled important roles in the taxation system. On the one hand, they represented a taxation (tax structure) element, its organic component. On the other hand, they fulfilled the function of an important tool in tax policy regulation.
Unfortunately, the current tax code of Georgia does not provide for a well-defined approach to their understanding. Tax benefits (often called preferences) represent a tool of realising the regulating function of taxes. In practice, the regulating function of taxes is performed by tax accounts, forms and rules of taxation, differentiation of tax rates, classification of distribution spheres of tax rates, etc. though among them tax benefits system is more effectively and easily realisable. For a state it represents a purposeful tool of influence in each stage of reproduction aimed at stimulating or, on the contrary, at hampering this or that entrepreneurial activity. Tax benefits contribute to economic growth (or reduction and stagnation), increase of investment and labour activity, speedy capital accumulation, stimulation of priority branches and production.
The current tax code of Georgia does not provide any commentaries on tax benefits though a list of tax benefits holds quite a great place in legal implementation of each tax. Proceeding from the above-mentioned, we think it necessary to provide a clear essence, purpose and tasks of tax benefits during the development of a new code (envisaged by the tax reform). At the same time, the tax benefits system should cover tax deductions and discount. They are viewed as a preferential tool of tax regulation on the international level with them having stimulating, investment, social and other regulating directions. Besides, we think that tax benefits system should include such economic mechanisms as tax deferment and tax credit. These could also contribute to relieving and reducing tax liabilities, which fully corresponds to the notion of tax benefits. Their disuse might lead to inefficient tax regulation.
In our opinion, tax reforms should provide for the increasing role and importance of tax benefits. Thus, tax benefits should be divided into three groups: tax exemption, tax discount and tax credit.
The system of tax benefits regulation can be schematically expressed as follows (diagram 1):
The first group of preferences in tax exemption is quite diverse. It covers different kinds of benefits. Among them, it would be advisable to use the following:
? Tax amnesty – means exemption from tax liabilities accrued through breaches of tax law. First of all, this should concern taxpayers that broke the law due to the neglect of their duties, but afterwards admitted their mistake and informed taxation bodies on it. We should hereby note that very often in transition period when almost each month amendments are made to the tax code and when the governmental structures do not provide taxpayers with informational, instructional and educational materials, debts are accrued and fines imposed because of taxpayer’s unawareness. In civilised market economies, governments undertake provision of taxpayers with complete and comprehensive information. From this point of view, the situation in Georgia is unsatisfactory. Information on tax problems and modifications in law is not provided to wide public due to the crisis in energy and communications, high prices on printed production, unlimited “freedom” of public TV and radio channels. Added to this, is disorder in the system of professional improvement and training. And lastly, there are no partner and business relations between taxpayers and taxation bodies. Very often representatives of taxation bodies deliberately conceal information on amendments from taxpayers so that the latter would make more mistakes in tax accounts. Tax assessors are encouraged to do so by a system of material stimulus based on the amount of tax-evaded sum discovered by them. In other words, the more breaches a tax assessor discovers, the greater salary he will receive.
Proceeding from the above-mentioned, we think that in transition period it would be advisable to apply methods of tax amnesty for the taxpayers that made an accidental mistake in tax accounts, which leads to an accrual of tax liabilities.
? Tax benefits – mean tax exemption of certain categories of taxpayers. This approach should concern invalids of the World War II, participants of the battle for territorial integrity of Georgia, and other disabled people. Such benefits should principally concern physical persons but not so much legal entities. There are entrepreneurial and social associations in Georgia that are entitled to different kinds of benefits. Unfortunately, such a system of benefits is changeable causing contradictions between the authorities and structures of benefits. Very often this becomes grounds for demonstrations and hunger strikes provoking social tension in society.
As far as we can see, it is necessary to make a list of taxpayers’ categories that are entitled to tax benefits. It must not be subject to moratorium of amendments. This will help to ease social tension and stabilise economic and social situation.
? Tax refund is used when money is paid in excess of factual tax. There are different reasons of it among them a mistake of taxpayer in tax accounts, non-use of benefits, imposition of excess tax by taxation bodies.
The rule of refunding excessive VAT and excise sums should become subject to modification. Under the current law, in case the VAT sum is more than the accrued one, it is refunded to the taxpayer within 15 days after submitting a notice. We think if taxation bodies levy a greater tax than set forth by the law, the sum must be refunded to the taxpayer with interests. The matter is that in case of the violation of payment terms by a taxpayer, a state should impose fines and levy increased taxes. Proceeding from the justice principle, the same rule should be applied for breaches of tax law by taxation bodies.
One of important and unsolved problems is tax refund from budget. Nowadays, this sum exceeds 7 million GEL. The financing of the sum is formal. In fact, it is not refunded or it is refunded through the intervention of influential circles. This lays the foundation for corruption and bribery. We think that illegally (excessively) paid sum that is subject to refund, should be covered by some articles of the budget and refunded in accordance with priority principle.
? Tax holidays should be used widely in the conditions of transition economy. It means complete tax exemption of some taxpayers for a certain period. The mentioned tax benefit is not applied in Georgia, which is testified by neglect of this category in tax code. We think that mechanism of tax holidays should be used when the functioning of economic subjects faces a danger of incorrect state resolution or natural calamity. For instance, modifications in tax law cannot be made after an approval of an annual budget. In this case, enforcement of modifications should be postponed till the beginning of a budget year so that economic subjects could change their business-plans and strategy of business activities. Tax holidays should also be widely used in case of spontaneous misbalance. The mentioned benefit has a special importance in Georgia, as there are frequent draughts, hails, and floods bringing much damage to agriculture and municipal economy. From this point of view, the use of the mechanism of tax holidays for certain kinds of taxes is quite justified.
? Reduction of tax rate is one of widely spread tax benefits implying partial reduction of legal tax rates or complete exemption from the tax.
Unfortunately, the tax code cancelled a whole number of benefits connected with the partial reduction of tax rates as well as the ones promoting restoration and development of country’s industrial sector. It is not, certainly, advisable to widely use the practice of partial reduction of tax rates as it obstructs the work of taxation bodies and creates favourable conditions for tax evasion and concealment of income. Yet, the use of the mentioned model is essential and advisable in some cases, especially for the development of priority branches and for economic subjects that produce competitive export production and service. It also creates favourable conditions for attracting foreign investments.
? Investment premium can be viewed as some kind of tax benefit widely spread in developed countries and less applied in transition ones including Georgia. It implies reduction of corporations’ profit tax rates during the export of capital to foreign countries. Companies are granted premiums for making direct investments abroad. They strengthen their financial resources during the functioning of production in other countries by means of reducing profit taxes.
As mentioned above, tax discounts belong to the second group of benefits aiming at practical realisation of the regulating function of taxes. Tax discounts are difficult to be used as they are connected with different terms of obtaining the right to these benefits.
Untaxed minimum is a principle kind of the mentioned group of tax benefits that is widely used in almost all countries as well as in Georgia. The mentioned benefit is often applied for VAT and income taxes. Unfortunately, neither of them is regulated by the tax code of Georgia, which requires serious improvement. The matter is that nowadays 9 GEL is untaxed minimum with cost of living per head exceeding 100 GEL and many pensions being 14 GEL. Such small untaxed minimum contradicts the principle of justice and causes negative reaction of population.
The amount of untaxed minimum for the taxation of VAT is small, too. “True, it has grown from 3 thousands to 24 thousands GEL, but still it is a small figure. Thus, petty economic subjects are included in the list of VAT payers. Raising VAT from them causes too much difficulties”.
A discount on depletion of fossils belongs to the second group of benefits that implies tax discount. The latter is used for extractive branches of industry the expenses of which are great as compared with the average industry index. The matter is that exploitation of minefields that petered out due to outdated, amortised equipment requires too much expense, but in this case tax benefits encourage entrepreneurs to extract useful fossils with maximal efforts. Unfortunately, under the tax code of Georgia, during the taxation of the use of natural resources a list of tax benefits does not provide for tax discount on depletion of resources. We think it should be realised in the future as the natural environment of extracting unique fossils deteriorates more and more. The equipment and technology of extracting them are outdated leading to additional expenses.
The mechanism of accelerated depreciation is one of specific forms of regulating economy by means of tax benefits. It gives enterprises the possibility to reduce tax base during the taxation of income and property tax as well as save financial resources for replacing outdated equipment with a new one.
Unfortunately, the mechanism of accelerated depreciation is not envisaged by the tax policy of Georgia. This stands in the way of the mobilisation of internal investment resources and technical and technological rearmament of enterprises. Therefore, we think it necessary to enter the mechanism of accelerated amortisation in the list of expense deduction during the calculation of enterprise profits, especially in the kind of production that uses morally and materially outdated equipment and technology, which will, undoubtedly, serve to renew productive assets, improve production competitiveness and increase the volume of export production.
Tax credit – the benefit of the third group in the mentioned classification – holds a special place among the mechanisms of tax benefits regulating economic processes. There are different viewpoints about the mentioned benefit in economic literature. On the one hand, the category of tax credit is viewed as tax deferral and, on the other one, it is seen as a form of tax benefits aimed at the reduction of tax rates and paid sum. In our opinion, we should agree to the first viewpoint about the category of tax credit implying tax deferral. As for the reduction of tax rates and sums paid, this procedure is not associated with the category of credit provided all kinds of credits are subject to tax refund. It is a different case here. There can be two kinds of tax credit deferral. The first one implies that interests are not charged on deferred sum and the second one implies that interests are charged on tax sum though they might be less than bank interests. Otherwise, a taxpayer will not have any stimulus for such operation.
We think that tax credit, as a tool of economic regulation should, principally, be used for the control of investment processes. In other words, this credit should have investment direction. It should provide stimulus for the investment and innovation activities of enterprises.
Thus, reasonable use of tax benefits system creates favourable conditions for the realisation of regulating functions of taxes. Despite this, use of tax benefits was not widespread in conditions of transition economy. Moreover, current benefits are reduced and abolished under the slogan of regulating tax benefits. This process, principally, is based on recommendations of foreign experts and international financial institutions. Their task is struggle with corruption and hide economy. We think that tax benefits being a mechanism of the stimulus of economic regulation and development of national economy cannot be ignored. Illegal tax benefits, especially the ones imposed through the lobbying of clan groups should, certainly, be abolished. However, at the same time benefits aiming at the solution of investment problems and development of strategic branches of national economy should be used widely, too. As for the corruption aspects of tax benefits, it should be struggled with as identified by the programme on struggle with corruption in Georgia.
Thus, despite the increasing negative elements, tax benefits have a special importance in transition economies. Tax benefits should, first of all, be aimed at the release of competitive production which, in its turn, causes economic and fiscal effect in the nearest future.