GEORGIA`S ECONOMY AS AMERICA SEES IT OR WHAT SHALL WE DO?

MAIA RAZMADZE

To experts’ and entrepreneurs’ mind, transition of 70-80% of legal economy into illegal sector as well as high level of corruption was caused by the Tax Code recommended by the International Monetary fund.

Entrepreneurs have long submitted a new variant of tax code to the Parliament. Strict administration and liberal basis has become a main principle of small group that is working on the Code. Their work was financed by Soros Foundation and Georgia entrepreneurs.
Lancelot Fletcher, expert on economic issues, chairman of Financial Committee at the American House of Commerce and director of liberal education centre, has also taken part in the work of the group. He shares his opinions on novelties of the new tax code, Georgian economy in general and its not so remote perspectives. About relations with donors and their recommendations
Developing countries as well as Georgia take credits in the form of assistance. The purpose of these credits is to promote economic development of a country, but very often credits do not serve the main objective and therefore, bring no result.
Credits allotted by donors are like investments from which profit is supposed to be derived only after economic development of a country. Investor does not need to determine necessary ways for the development or foresee perspective. Instead, he should view the person he gives investment to as partner. Representators of different international organisations might not agree to my opinion, but donor organisations should admit that allotting credit is risky. However, credit recipient takes into considerations their advice as donor organisations also give recommendations. It is not ruled out that this advice might turn to be ineffective for the economic development of this or that country. Therefore, when making investments, donor should realise that this might not cause desirable effect. This might even be their fault. As donors thrust their advice on credit recipients, they should also take responsibility for results.
Hasty privatisation process and results of implemented recommendations
In the beginning of 90s great pressure has been exerted by donor organisations on Georgia. i.e. property privatisation. The main result of this hasty privatisation was that main assets of Georgian enterprises (factories and other large objects) got into the hands of the former Soviet Union officials. Thus, after independence bureaucracy was still preserved in Georgia. These people had no idea of enterprise, market economy.
About faults and corruption of the tax code
The present tax code of Georgia was created, mainly, by Victor Turion, IMF collaborator. It is based on the tax codes of Western European countries with priority attached to VAT. This Tax Code has not suited Georgian economy from the very start. Its greatest drawback is that it is too difficult and complex. According to the code, an entrepreneur pays 18 different kinds of taxes with each tax having its own instructions and requirements and being paid at different places. Management of such taxes gives rise to many problems. It is even more difficult in Georgia where banking has not developed appropriately and where 70-80% of financial deals is concluded via cash by evading banks. Management of taxes stipulated by the Georgian tax code would be possible only in a country where financial deals are concluded by means of appropriate documentation, bank and credit cards.
The gross domestic product totals 3 billions in Georgia. However, many foreign experts think that this figure is 12-14 billions in reality. If there were reasonable tax code and tax administration in Georgia, the country would receive these revenues in the conditions of such GDP. The fact that Georgian government receives only 600 millions per year is caused by the ineffective and unreasonable tax code thrusted on Georgia by IMF.
Being IMF representator, I would say that the code has provided for everything. The reason of low revenues is inefficient management. However, the real problem is the tax code itself. If all taxes are paid, much of Georgian business will merely be ruined. In the conditions of this tax code, businesses will be able to survive only via corruption. The reason of it is lack of political will for solving problems connected with corruption and tax revenues.
It should be easy for a taxpayer to calculate and determine how much he owes to the state in the form of state taxes. When a tax-payer has to rent a lawyer to calculate taxes, when it is difficult to determine, there will always be favourable conditions for corruption. Tax evasion in your country is so spread that tax burden remains low. Tax revenues might increase in the background of taxes and tariffs so that tariffs in other countries would be low. This is followed by growth of real revenues.
Nowadays, there is no logical correlation between tax tariffs and tax revenues. Tax revenues constitute the sphere of tax department and inspectors’ interests. They must collect particular amount of taxes irrespective of tariffs. This system was in practice already in middle ages. It was called “farm of taxes”.
Georgia has to take into account advice of donor organisations, pass tax code or laws recommended by them. It is difficult to fight with corruption in the conditions of such tax code when officials do not have enough income to live on salary.
Another constituent of this close circle is the present interest rate of bank credits. In Georgia it is 2-3% per month. No reasonable and healthy business undertaking would afford paying such high rates in case the undertaking is planned for lengthy period. The international bank society is responsible for such high interest rates as it fears inflation and thus, supports high rates. If people had a legal source of monetary means, they would not resort to “Mafia”. Such high rates obstruct business development and make entrepreneurs resort to illegal business.
New Tax Code and its main principles
I told people who work on the Code that first of all we should decide whether we create a principally new tax code. We started to work on details only after agreeing on these issues. The new Tax Code should function as one integrity.
What new results will the Tax Code cause? Tariffs will be low while taxable base will increase. At the same time, taxes will be simplified. The present 18 taxes will be reduced to four under the new code.
The principal objective of the tax code is that the government and taxpayers should become partners. It would be difficult and at the same time important to explain this to people. Today, people do not see any interrelation between taxes they pay and the service the government would provide them instead of taxes. People of the former Soviet Republics can hardly realise this. The government should aim at making favourable tax code for establishing partner relations between the code and taxpayer.
The most important novelty of the Code is abolishment of social taxes that will be replaced by the system of social insurance. Social foundations will be formed. At the same time, the Code offers 15% rate of VAT. A new method will change significantly the existing method of VAT calculation and invoice system. Administration and collection of VAT involve much difficulty. The general approach of the new Tax Code forms real basis for improvement. A taxpayer will make estimation, fill in declaration and submit it to officials and tax inspectors. This helps to avoid any transactions.
It should be foreseen in advance how the new tax code and new rules of administration might affect the mobilisation of revenues. The Finance Minister and IMF fear that any correction or reforms concerning the tax code will result in the loss of a great part of incomes. This fear is not groundless. We should foresee how the reform would affect revenues. There might be no profits at the start, but at least, there will not be any loss.
A little about the perspective
Georgia has the real chance to become a rich country not in the remote perspective, but in the nearest future – in 5-10 years. You have lots of talented and educated people to form basis for the modern economy. Today, many people think that Baku-Jeikhan pipeline is the only way for survival. However, 10 years later after looking back at the future, you will see that it was not so. There are many other possibilities.
Absurd as this idea might seem to you, but Tbilisi has a very good location between Beirut and Bombay for the International Financial Centre. It is necessary to form banking system with this purpose. Nowadays, banks exist outside banking system.
Technologies develop very fast. You yourself can introduce new technology though these technologies are now much cheaper than 10 years ago. Thus, a country with simple technologies can turn into a country with modern technologies in the nearest time.