Government Seeks Business-Friendly Tax Code

The Georgian government vows that Georgia will have the most liberal taxation system in the post-Soviet sphere by 2005. Georgia hopes for vast investments after the easing of tax burdens and the simplification of tax administration.
 
“Our main principle while drafting the document was that Georgia should have a more liberal tax code as compared with our neighboring countries, which will foster the creation of an attractive investment environment in the country,” MP Shota Gvenetadze, a member of the governmental commission working over the new tax code, told Civil Georgia. 
 
According to the proposed tax code, which is available on the Finance Ministry’s official web-site (in Georgian only) for public discussion, 12 out of the current 21 taxes will be cancelled, including the tax on ownership of motor vehicles; tax on transfer of property; tax on economic activity;  tax on polluting  the  environment  with  harmful substances; tax on bringing overloaded vehicles into the territory  of Georgia; a fixed tax;  a tax on small business; a tax on resorts; a tax on hotels; a tax on advertisement; a tax on use of local symbols and a tax of use of local roads.
 
Shota Gvenetadze says that because of the cancellation of these taxes, the budget will lose at least 72 million Lari annually; however, authorities hope that improved tax administration and tax collection will compensate for this loss.

According to the proposed tax code, only the following 9 taxes will remain in force: income tax; social tax; profit tax; value added tax (VAT); excise tax; property tax; gambling tax; property tax and tax on use of natural resources.
 
The rates of some of the taxes will also be reduced as well. The social tax will be reduced to 20% from current 33%; income tax – from 20% to 12%, value added tax – from 20% to 18%. The profit tax, however, will remain at 20%.

The new tax code is planned to be enforced starting 2005. However, the government intends to test the new system earlier and begin the enforcement of the social and income taxes – 20% and 12% respectively as early as November 2004.
 
During this testing period, the government will insure itself and set up a so-called 50 million Lari reserve fund. If the experiment fails to justify itself, the reserve funds will be used to compensate the losses, thus avoiding further budgetary shortfalls by the end of 2004.
 
“The decision is risky enough, but owing to improved tax administration [and collection], the possibility of failure will be reduced. I do not think that, under conditions set forth in the new code, we will receive less tax revenues than previously,” Shota Gvenetadze told Civil Georgia.
 
“The government will compensate the losses from improved tax collection. Tax Administration should be conducted at the highest level, the preconditions for this already exist,” he added.
 
However, the Georgian government wants to increase excises and taxes on gambling business, which is cause for concern among some representatives of the business community. Reportedly, tax rates will increase on almost all excise goods. But the authorities remain cautious over the increase of the fuel excise tax, fearing it may lead to an increase of prices.

“The main goal of the new tax code is to receive a fiscal effect, to improve the investment environment; that is impossible when one tax is decreased and another is significantly increased,” Vice-President of the Georgian Chamber of Trade and Commerce Shota Makatsaria told Civil Georgia.
 
However, the authorities say that they are open to the discussion of new proposals. A draft will be shown to companies operating in Georgia to make sure their accountants can understand it.
 
“We should not have to explain to ordinary accountants what this or that provision of the code means. We should simply write it so that it is clear for everyone,” MP Shota Gvenetadze said.
 
Zurab Kharatishvili, who chairs the Georgian Federation of Professional Accountants and Auditors, told Civil Georgia, “the proposed tax rates are more or less acceptable. But the administrative part of the code is too vague. It is even worse than the current one.”
 
“The government is ready to take into account all the remarks made by businessmen and independent experts. Naturally, a great deal of critical opinions will be expressed during these discussions,” Giorgi Isakadze, executive director of the business lobby group “Taxpayers Union”, told Civil Georgia.
 
The new tax code does not envisage any privileges and provides equal conditions for both local entrepreneurs and foreign investors.

The government has already submitted the new draft code to the International Monetary Fund for consideration. The IMF will deliver its conclusions and recommendations within a month.
 
“We will take into account those recommendations [by the IMF] which we find to be the most acceptable for Georgia,” Finance Minister Zurab Noghaideli said.
 
In early August the final version of the tax code will be submitted to the Parliament for approval. The legislative body is expected to approve the draft code in September.