New Tax Code in Progress

Opposition Disappointed as Government Breaks Promise over VAT

The Parliament approved the new draft tax code during its second hearing on December 9, after a month and a half of heated debates between parliamentarians and the government. Chairman of the Parliamentary Committee for Budgetary and Finance Issues Roma Gotsiridze said that “starting in January, Georgia will have one of the most preferable taxation systems [in existence].”

But despite the government’s earlier promise to reduce the value added tax (VAT) by 2% starting from January 1, 2005, the VAT will remain at its current rate, 20%, for six more months. According to the draft tax code a reduced, 18% VAT will be enforced only from July 1, 2005, a move which triggered the parliamentary opposition to vote against the draft.

“We have no guarantees that after six months the government will not break its promise again and propose to postpone enforcement of the reduced VAT,” MP Zurab Tkemaladze of the opposition New Rights-Industrialists parliamentary faction told Civil Georgia on December 9.

“I do not think that preservation of the current VAT rate is a step forward,” opposition MP from the Republican Party Davit Berdzenishvili said at the Parliament’s session on December 9.

According to the new tax code, only 7 out of 22 taxes will remain in force. The rates of some of these taxes will also be reduced as well. In particular, the social tax will be reduced to 20% from the current 33%; income tax – from 20% to 12%; value added tax – from 20% to 18%. The profit tax, however, will remain at 20%.

Beginning next year, taxes on gambling businesses and excise taxes on petroleum products, tobacco, ethyl alcohol and wine will increase, in an attempt to cover the a 300-million Lari backlog that will be created as a result of the cancellation and reduction of other taxes.

The current tax rates will remain on motor vehicles, which is based on the age and engine size of each car. However, initially the government wanted to impose additional taxes on motor vehicles – the VAT and excise tax. The proposal was met with strong opposition by parliamentarians and car import companies in Georgia. As a result, the authorities rejected the proposal. In exchange, the parliamentarians agreed to postpone enforcement of a reduced VAT.

Another issue which fuelled debates between parliament and the government was the property tax. According to the draft tax code, those families whose annual income exceeds 40,000 Lari (approximately USD 22,000) will pay an annually percentage on their total property assets, ranging from 0.05% to 0.2%, while those families whose annual income exceeds 60,000 Lari (approximately USD 35,000) will pay an annually percentage ranging from 0.2% to 0.4%; any family whose income exceeds 100,000 Lari (approximately USD 55,000) annually will see their property taxed between 0.4% to 0.8%. The local governmental bodies will be in charge of defining the exact percentage rate for property tax.
 
“This means that almost 90% of the population will be completely exempted from property tax, as most of the people in Georgia belong to low-income families,” Roman Gotsiridze said.
 
According to the new tax code, the print media will be exempted from all taxes, except income and social tax. However, these tax benefits will not be extended to the electronic media.
 
The draft of the tax code envisages tax benefits for the agriculture sector as well. Particularly, agricultural products will be exempted from VAT.