ABOUT FORMATION OF STIMULATING TAX MECHANISMS OF PRIVATE ENTERPRISE DEVELOPMENT

BY. Mariam Vardiashvili

Serious transformation is necessary for the tax mechanism in Georgia aimed at improving the efficiency of social production and meeting demands of population These changes must include tendencies and specifics of economic development.

The main principles and postulates of the functioning of the modern tax system are based on the conception of “supply economy” and impliy high tax burden and interrelation of budget revenues, stimulating influence of liberal taxes on entrepreneur’s investment activity. This attitude is based on the wish of economic subjects to invest their own incomes with the purpose of increasing future ones, which, in its turn, increases tax base.
Apart from the tax liberalisation policy, “supply economy” envisages for the conception of tax “neutrality” in accordance with which taxes must not influence commercial decisions.
Low and neutral tax rates increase entrepreneurial activity and production efficiency at the expense of technical disarmament and modernisation.
Tax policy must provide for the equal taxes from equal incomes. The “neutrality” principle of tax system in the country will serve to significantly increase tax base and will correspondingly increase the probability of decrease in tax rates.
During the tax reforms, special attention is attached to the encouragement of investment activity in all spheres of production. Last ten years’ experience of tax reform shows that reduction of income rates and tax exemption of the business connected with financing of capital investments is an important stimulus of investment activity. This makes it possible for an entrepreneur to expand his sphere of activity, to increase profits and expand production with his own income; to introduce new techniques and technology. Reform of natural persons’ income tax must play a special role in the stimulation of investment activity.
Tax income seems to be of a progressive nature in Georgia, but, in reality, it is of a proportionate nature. When persons with incomes of 600 GEL and 10 000 GEL have to pay one and the same taxes, this principle can hardly be called a fair one. Proceeding from this, we consider it necessary to change the current tax structures and rates. First – incomes of population must be liable to 12% tax rate after the calculation of living cost; afterwards, an average layer of society of population must be determined in accordance with total gain that must be liable to 15 and 22% tax rate. Maximal rate of taxation must be 30%. In this case, an average tax rate will approximately amounts to 20%, which means that tax on high incomes must provide for the compensation of budget losses due to low tax rates. We think that the gradation of population’s income in accordance with the proposed tax rates will, on the one hand, promote the entrepreneurial activity and on the other one, provide regular budget revenues.
It would be purposeful to integrate a system of enterprise profit and natural persons’ taxability. Double taxation of enterprise profits should be deemed as one of the most important drawbacks of taxation system. Under the current tax policy, profit tax is imposed on pre-distributed enterprises (20% rate), but after the distribution dividends of natural persons are taxed by 10% rate. It makes an influence on shareholders’ interests. We think that investment preferences will increase capitalisation interests. At the same time, shareholders’ interests for whom obtaining dividends are very important must be taken into consideration. This will make an influence on the final distribution of profits. From this point of view, experience of Germany is of much interest. The tax rule in this country rules out double taxation. If profit is not distributed among shareholders, tax rate of corporations’ profits makes up 56% and that of profit distributed in the form of dividends – 36%.
In modern tax policy special attention is attached to preference tax system. Encouragement of private capital investment activity by means of tax preferences has reached its peak in the end of 70-th and in the beginning of 80-th in XX century. It became clear that all this had a negative influence on the quality of capital investment and resources. It is doubtless that preferences have a negative affect on tax system and cause great budget losses. Preferences expose economic subjects to unequal conditions and create an unfair competitive environment, which serves to change motivation of individual’s economic activity.
Tax and budget code of Georgia provides for up to 150 tax exemptions and preferences. Other kinds of preferences create a special environment, too. For instance, system of tax indebtedness restructuring, optional delay of state credits repayment, etc. Illegal use of preferences must be strictly prohibited because It enable a taxpayer to evade taxes. As a result of it, budget losses are greater from tax evasions than from preferences.
On the basis of official data in Georgia 20-22% of a small number of legal imports is either tax exempt or have preferences. According to experts’ mind, after the abolishment of some preferences additional budget amounts would equal approximately 70-80 million GEL.
Attachment of priority to particular sectors of economy creates a situation of economic inequality, which causes taxpayers to hide income and damages tax system. Abolishment of tax preferences can be deemed as one of the strategic directions of tax policy in Georgia that will rule out the main factor – lobbying – by means of establishing benefits.
At the same time, we consider it advisable to compensate tax benefits by means of financing budget assignations with the aim of social security.
Analysis of some tax dynamics, study of factors influencing it and finding out which structure of production we have to deal with is very important for the development of measures designed to improve tax system.
Share of social taxes is very important in the volume of enterprise and organisation taxes. Under the article 188 of Georgian tax code, an entrepreneur is obliged to pay 27% of expenses for salaries, but not less than 16 GEL per employee. It serves to increase tax burden of enterprises significantly.
We think that taxation rate in this sphere should be reduced significantly. According to experts’ estimations, its level must not exceed 20%.
Reduction of both taxation rates and tax burden will cause tax liberalisation and will expand tax base; it will also make it possible to provide new jobs.
Imposition of high property taxes for enterprises of capital-intensive branches serves to increase tax burden and deteriorates its financial state. Therefore, it is necessary to differentiate property taxes by means of regression principal, which implies reduction of tax rates as well as simultaneous increase of property cost. As far as we know taxes taken from earnings in accordance with financial results (for example, road foundation tax, economic activity tax) serves to deteriorate financial state. We think it advisable to abolish road foundation tax that performs only financial function. Yet, there is a great danger that expenses for maintaining road foundation will put a great on population. Therefore, these expenses must not be financed by means of specialised tax resources, but by means of accumulation of more efficient taxes in budget and their subsequent distribution.
Indirect taxes take greater and greater place in the structure of tax revenues. First of all, it is necessary to establish optimal correlation of direct and indirect taxes. Optimisation of direct and indirect taxes determines level of budget revenues.
We consider it advisable to abolish VAT preferences, reduce this tax rate and differentiation with the aim of overcoming disproportion. Taxes on consumption goods, child clothes, manuals of secondary and higher education establishments, medicaments the nomenclative list of which should be determined by the legislature should be reduced. These measures will stimulate increase of the above-mentioned business and will to a certain extent settle a problem of social security.
It is true each enterprise is interested in the increase of its production volume and realisation because profits are gained in this way, but the current law does not provide for its complete implementation. We mean first part of article 252 of Georgian tax code that concerns sanctions with 30-50 percent in case of use of money for other purposes by a taxpayer, which can finally destroy the entrepreneur potential of the country. It is clear that you will not be able to increase budget deficit by means of increasing penalty provisions and we will not be able to stop inflation growth rate. Therefore, it is better not to limit the development of enterprises by imposing heavy taxes on them.