Government Urges Lawmakers to Endorse Liberal Tax Code

“Beginning in January we will start a new life with the new tax code,” Georgian President Mikheil Saakashvili said on August 26 after the cabinet approved a finalized draft of the new tax code following five months of discussions.

Officials say the new draft tax code is liberal and business-friendly and envisages not only a reduction of taxes but also several measures aiming towards protection of tax-payers’ rights. The new code is expected to enter into force starting in January 2005, after it is approved by the Parliament in October of this year.

According to the draft only 8 of the current 22 taxes will remain: income tax; social tax; profit tax; value added tax (VAT); excise tax; property tax (which will absorb the land tax); gambling tax and tax on use of natural resources.
 
The rates of some of the taxes will also be cut. The social tax will be reduced from the current 33% to 20%; income tax – from 20% to 12%, value added tax – from 20% to 18%. The profit tax, however, will remain at the current 20%. According to the draft code differentiated rates of excise, natural resources and gambling taxes will be introduced.

The government, bound by early promises made by President Saakashvili’s, also agreed to grant tax exemptions to self-employed businessmen and manufactures. It is not specified, however, what kind of businessmen will fall under the ‘self-employed’ category, or, as the officials put it, “individual manufacturers.”  Farmers who own land no larger than 5 hectares will also be exempt from taxes until 2010.
 
“I doubt that the main principles of the draft code will be revised by the Parliament during the discussions. However, minor disputes surrounding various provisions might take place,” MP Shota Gvenetadze of the Parliamentary Committee for Finance and Budgetary Issues told Civil Georgia.
 
Observers expect that an increase in taxes on gambling business and excise, through which the government plans to counterweigh a loss of revenue from lowering other tax rates, may heat up debates in the Parliament.  
 
For example, an excise on oil products will increase by 30-50 Lari on average; an excise on tobacco products will be doubled and will reach 80 Tetri; an excise on ethyl alcohol will also be doubled while an excise on wine will amount to 70 Tetri. Taxes on gambling business will increase by nearly double.
 
The new tax code offers a novelty, described by authorities as an “acceptable depreciation system,” to those re-investing profits into expanding business dictating that they will be exempt from a profit taxes for the next 5 years.

“The draft [tax] code is very much geared towards the protection of the businessmen’s rights. That is why the document envisages several important measures, including the setting up of a Tax Arbitration body and the creation of a tax-payer ombudsman’s office,” MP Shota Gvenetadze told Civil Georgia.

Tax arbitration councils, described by the Economy Minister Kakha Bendukidze as a “revolutionary idea for Georgia,” will be composed of three members who will deal with particular disputes between the tax-payer and the Finance Ministry. One member of the council will be appointed by the tax-payer, another by the Finance Ministry and the third member through an agreement by the aforementioned two. A new council will be set up for each particular case. At the same time a limited time-frame – a maximum of two months – will be set for resolving disputes .
 
“Hence, under the conditions of so many protection mechanisms and taking into account the significant reduction of taxes, I do not think that the new taxation system will meet a significant opposition in the Parliament, or among the business circles,” Shota Gvenetadze said.
 
The Georgian government chose to ignore the International Monetary Fund’s position over the draft of the tax code, which recommended Georgia implement the code gradually, within three years.

Prime Minister Zurab Zhvania called on the Parliament to discuss the document and approve it by October in order to make it possible to enforce the new tax code starting in January, 2005.