Amendments to the Tax Code

The group of experts: Bela Gutidze, Temur Datiashvili, Teimuraz Kopaleishvili, Temur Mirianashvili, Nugzar Kavtaradze, Valeri Khanishvili, Mikheil Jibuti

The amendments have to do with absolute majority of the Code’s articles (out of 280 articles, amendments are introduced to more than 160 ones). The mentioned amendments should be divided into several groups.

A number of amendments has to do with proposals of the experts group concerning perfection of the tax policy (subjects and objects of taxation, base, methods, rates); a number of amendments envisage technical, contansive and terminological perfection of the Tax Code, and the other part of the amendments is of redaction character, though it is necessary to introduce them as well. At our today’s presentation we shall pay attention only to the amendments that are related to novations in the sphere of the tax policy’s perfection. The first group of these amendments has to do with the private part of the Tax Code. Here we touch upon the amendments in the parts of excises, VAT, profit tax, property tax and social tax.
The following amendments are envisaged in the excise part of the Tax Code:
1. We believe that in production of excise goods out of the customer’s raw materials, the payer’s obligation should be placed on the customer instead of the producer, except for the cases the customer is a physical person not registered as entrepreneur. The mentioned position is stipulated by the fact that in this case the excise goods are the customer’s property and its production has a service character only and handing over of the produced goods to the customer is not a supply of the goods, i.e. here transfer of the property rights for the goods does not take place. Proceeding from the aforementioned, corresponding amendments are envisaged in the operations liable to taxation (Article 255).
2. From our point of view, the persons that purchase excise goods from persons not registered in the tax authorities should also be added to excise tax payers. The order of excise inverse taxation is proposed, which will contribute to creation of the competitive environment in the country for the registered producers of excise goods. The person of a partnership producing excise goods who is charged with management of the partnership’s activities, including obligations of settlement of accounts with the budget, will be added to excise payers. The mentioned issue has not been solved so far, and it often causes disputes between the payers and the state structures.
3. In Article 256 of the Code we envisage a possibility of correction of the paid or declared sum of the excise in case the supplied excise goods is completely or partly returned to the excise payer in view of the goods’ bad quality or non-fulfillment of the contract terms. This kind of regime is currently effective in the VAT part, and it is necessary that the same regime should be effective in the excise part.
4. The group of experts envisaged significant changes in the sphere of excise taxation of tobacco goods. The changes in this direction have already been implemented in the Code, though, according to our project, the excise rates should have been lower (approximately at the level of 2004), and we have doubts that currently effective rates will again contribute to retaining of the situation contributing to contraband promotion.
We consider the reduction of the excise rate for diesel fuel from 150 GEL to 100 GEL as a expedient.
The recommendations are envisaged for excise taxation of exported logs and sawed material in the amount of 100 GEL for cubic meter of timber material, as a result of which not only increasing of budget revenues will take place, but also the uncontrolled export of timber resources from the country and decreasing of the forest fund will be reduced considerably. As it is known, on average 200 thousand cubic meters of timber is annually exported from the country.
The reckoning mechanism of the paid excise for the corresponding production resources envisaged in Article 260 is being improved considerably. The currently effective redaction of the Code does not give a well-defined understanding of what is written in it, which often becomes the reasons for disputes and taking of incorrect decisions. Proceeding from the stated above, a new reduction is presented, in accordance with which the excise sum paid for the raw material used for production of excise goods will be fully reckoned in case of receiving of the attendant non-excise goods in production of excise goods. Besides, the project envisages a full reckoning of the excise sum paid for the raw material in case of ageing of the wine material and cognac spirit, which contributes to subsequent development of this branch.
In the VAT part the project envisages amendments that rule out ambiguous provisions in registration of the payer’s tax. At the same time there are important amendments in determination of the operation liable to taxation and from the viewpoint of implementation of the paid VAT’s reckoning, which rules out the possibility of double taxation of the same goods.
Besides, exemption from VAT of import of natural gas (import and supplying), timber, coal, coke and anthracite is envisaged, which, in conditions of purchasing in Russia of natural gas at the increased tariff, will give us an opportunity to supply gas to the population according to the old tariff or in conditions of its insignificant increasing, and exemption for import of timber and fuel will make it possible to preserve the forest fund and meet the population’s demand for fuel.
The project envisages registration of a person as a VAT payer, including in case of a voluntary registration of the payer, a possibility of reckoning of the paid VAT sum on the basis of the remainder of goods existing for the day of registration, which is not envisaged by the currently effective Code. At the same time the ban for VAT reckoning is canceled if the payer has not submitted the tax invoice to the tax authorities during the period of 45 days. All the aforementioned gives an opportunity of ruling out cases of double VAT taxation of the same goods and putting all VAT payers, including voluntary registered persons, in equal conditions. Voluntary registration, in its turn, should not imply indirect application of the sanction by means of banning of reckoning for the remainder of goods. According to the project, the mechanism of returning to the payer of the sum excessively added on to the VAT sum will acquire a civilized form. In particular, it is suggested that the excess sum added on to the VAT sum should be returned to the payers that implement export of the goods if its volume makes up not less than 25% of the total turnover liable to taxation within 15 days from the day of demand, instead of the currently effective period of 1 month, while for other payers the mentioned sum should be reckoned in the sums liable to payment for the next accounting period or, in case of absence of the same, it should be returned to them within the period of 15 days, instead of the currently effective 3 months’ period, which will give payers an opportunity of using their of financial resource for further development of their activities, which is one of important conditions of increasing of budge revenues. According to the amendments introduced here, the 6 months’ period was substituted for the 3 months’ one, which is good, though it is not sufficient and acceptable.
Also presented is the 10% VAT taxation regime, which is approved in many countries including Russia and Armenia, for separate descriptions of food products (wheat, flour, bread, matches, butter, margarine, legumes cultures (soy, haricot, peas), salt, rice, cattle, fresh meat (except for wurst, ham and tinned meat), milk (including dried milk powder) and dairy products, buckwheat, potatoes, corn, barley), which we consider as an important arrangement for protection of impoverished social groups.
Amendments in the income, profit, property and social payment part are mainly oriented to rendering assistance to the development of small business. From this point of view, we consider it necessary to introduce the following amendments to the Tax Code:
1. The incomes of the entrepreneurial physical persons that do not use labor of hired persons should be exempt from the taxes on property in profitable, social and economic activities. This privilege should not be applied to producers of excise goods, incomes received from trade activities and incomes of the persons whose activities are not considered as entrepreneurial ones in accordance with Paragraph 2 of Article 1 of the Georgian Law on Entrepreneurs, except for the incomes received from agricultural and consulting activities. The part of incomes of physical persons that is reinvested in their entrepreneurial activities should also be exempt from the social tax. Correspondingly, the first Subparagraph “L” of Article 168 and Part 1 of Article 276 of the Tax Code should be formulated in the following redaction:
1. Subparagraph “L” of Part 1 of Article 168 – “L”) The income of the entrepreneurial physical persons that do not use hired persons’ labor, except for production of excise goods and the income from trade activities, as well as the incomes received from the activities determined by Paragraph 2 of Article 1 of the Georgian Law on Entrepreneurs.
2. Subparagraph A1 should be added to Part 1 of Article 276 – “A1”) Physical persons that are owners of the units determined by Subparagraph “B” of Part 4 of Article 272 of this Code that do not use hired persons’ labor.
Application of the progressive-regressive scale for differentiated calculation of profit’s volume will be a very important novation for the tax legislation of our country. The mentioned methods have been well approved in different countries of the world. For example, the countries called “Asian tigers” (Korea, Singapore, Malaysia, etc) widely applied them at the initial stage of economic development with a rather interesting and positive result. It is clear that these amendments will be applied to all enterprises, but they are especially effective for the development of small business.
The group of experts considers it important to introduce the differentiated regime of taxation with social taxes for individual entrepreneurs.
Correspondingly, the income of physical persons in the amount up to 20 thousand GEL that is liable to taxation that is determined according to Part 1 of Article 166 of the Code will be taxed at the rate of 7.5%, and the income in the amount of more than 20 thousand GEL will be taxed at the rate of 15%.
With the purpose of stimulation of small enterprises, application of progressive scale of taxation is suggested for taxation of profits. In particular, the profit of enterprises in the amount of up to 20 thousand GEL that is liable to taxation will be taxed at the rate of 10%, and that of more than 20 thousand GEL – at the rate of 20%.
Besides, in comparison with previous tax year, 50% of the profit surplus sum will be taxed at the rate of 15%. This rule will be applied only in the case if the enterprise carried out activities during the whole previous tax year and the sums paid out in the form of salary, in calculation for one hired person, will not be less than the previous year’s corresponding indicator.
The draft law envisages, in purchasing by the buyer at a time, within 100 GEL from one hand, but no more than 500 GEL worth of agricultural products (before primary processing), as well as in purchasing of slaughtered animals and birds, fish products, in application of a simplified order of documentary registration of the fact of purchasing without identification of the seller with issuing of a simplified invoice, in application of this accounting order by the seller, the cost of the goods will be deducted from the total incomes by the cost of these goods’ purchasing, but no more then their market price.
The draft law envisages deduction from the total incomes of the expenses that are directly related to entrepreneurial economic activities of the payer, but they do not increase his economic profit. In particular, losses within natural and technological norms, losses related to spoilage of the product, force majeur circumstances, defects made in the process of production, losing of marketable condition.
Regulation of relations between tax payers and the tax authorities
From this point of view, the third group of amendments to the Tax Code has to do with perfection of regulatory norms concerning the relations between tax payers and the tax authorities. In particular, here we shall touch upon the issues related to settling of tax disputes, fines, recovery of excessively paid taxes and giving of instructions and explanations of the Code’s provision to tax payers. Currently tax disputes are regulated by Chapter 8 of the Tax Code. The Code envisages consideration of tax disputes both in the system of the Ministry of Finance and in the court. At the same time, consideration of disputes in the system of the Ministry of Finance can be implemented at three stages – in the Tax Inspection, in the Tax Department and the council for consideration of tax disputes under the Ministry of Finance. The practice of the past period has shown that the three stage system of dispute consideration is rather ineffective and it is purposeful to bring it to one stage – in the Tax Department.
In the process of consideration of tax disputes, frequent are the cases when state bodies deny a tax payer consideration of a suit in case of the document’s imperfection, after which the tax payer loses an opportunity of consideration of the suit in the system of the Ministry of Finance in view of breach of the term. We imply the amendment to the corresponding articles of the Code, according to which the Tax Inspection (Department) is obliged, in case of the document’s imperfection, to give a period of time to the tax payer for correction of the indicated inaccuracies. Of course, here the matter concerns inaccuracies that have no effect on the subject of the dispute.
According to the amendments, in case of non-taking a decision on the tax payer’s appeal or suit within the designated period of time and/or its non-sending to the tax payer, carrying out by the tax authorities of arrangements for forcible payment in relation to the payer will be possible according to the court’s decision only.
Another amendment has to do with the period of implementation of tax disputes. Currently this period is limited to 15 days from the moment of the tax demand’s receiving (later on 5 days’ period twice for the appeal in the Department and the Ministry of Finance). According to the project of amendments, the payer is given the right to appeal against the decision of the tax authorities any time during the period of 6 years, in case of revelation in the disputable issue of new circumstances or new documents, in spite of the fact whether this issue (decision) was appealed before and whether the tax obligation was recognized by the tax payer and whether he paid the tax or not.
The project envisages a considerable liberalization of responsibility fixed for tax offences.
Some of our suggestions in this direction have already been realized, others should be concretized after consultations with the Ministry of Finance and then formulated as a legislative initiative. Certain amendments are envisaged in the part related to recovery of the excessively paid sums.
According to the project, a one month period is envisaged for the recovery of the excessively paid sum (except for VAT and excise) instead of the 3 month’s one, as well as inculcation in favor of the payer of the fine for expiration of the sum recovery term in the amount of 0.07% for expired day. Besides, recovery of the sum should be carried out from the single budget earnings account and not from the special sub-account, as it is envisaged in the currently effective Code.
Article 47 of the currently effective Code envisages the right of the head of the tax authority to explain to the tax payer in written form the position of the tax authority concerning application of separate provisions of the tax legislation. As at the same time, this kind of explanations have no obligatory legal force from the viewpoint of the Code. This article causes a lot of ambiguities and puts a decent payer in a no-go situation. If the payer does not understand any of the Code’s provisions and asks an explanation from the tax authority in this respect, and the tax authority gives him this kind of explanation, the payer will not be protected before the sate in case of a dispute anyway. With the purpose of correction the mentioned inaccuracies, according to the project of amendments, the tax authority is obliged, in case of a question on the part of the payer, to explain to him how he should fulfill the Tax Code’s requirements. In case of fulfillment of these requirements by the be the payer, no tax sanctions will be applied against him.
With the purpose of provision for payers’ protection of, perfection of services to payers and broad inculcation of the “one window” principle in attending to payers, the tax authorities render services to payers according to the standards of services adopted by the Ministry of Finance of Georgia. At the same time, it is expedient that the service standards should envisage the requirements that rule out a direct contact of a payer and a tax inspector during submitting by the payer of declarations and accounts.
In our opinion, the made suggestions will give a good incentive for the development of small business in the country, along with all attendant positive phenomena (population’s employment, considerable solving of social problems, raising of the living standard, etc).
In conclusion we would like to point out that the amendments submitted for consideration today, and the amendments that are aimed at perfection of the texts of the Code’s other articles will undoubtedly cause improvement of business environment in Georgia, contribute to the development of private enterprise, formation of legal relationship between entrepreneurs and the state.