Taxation Privilege Crediting State
13 December, 2012
Taxation Privilege Crediting State
The intricate mechanism of the new socially oriented income tax exemption looks very much alike a yearlong yield-free crediting of the state budget at the expense of the exempted target group.
The income tax will not drop by 2% starting 2013 as the tax code envisages but will adopt the more social-oriented preference: it exempts the subsistence minimum equivalent sum of GEL 150 in the income tax to employees with monthly salaries less than GEL 500 that makes the overwhelming
majority in Georgia. Meantime based on the official statistics of 2011, GEL 636 is the average salary in Georgia. Critics say the proposed taxation preference kills incentives to ask for higher salary if you have GEL 450-500 for example.
But the 2% drop might lead to around GEL 160 million of losses in the state budget of 2013 while the untaxed subsistence minimum burden goes to the state budget of 2014 as Ministry of Finances (MOF), explained to Georgian Journal. This is very important to the state as the social-care burden increased to GEL 2.473 billion including social health-care insurances in the draft budget of 2013. Therefore, the new government changed its mind to cut the income tax by 2% to 18% starting 2013 and supplanted it with the socially-oriented initiative that gains more political score generally.
However, the exempted target group will not feel the preference immediately starting January of 2013 when the new income tax privilege enters into effect but only after a year.
The reason is the intricate taxation mechanism exempting the 20% in GEL 150. As Nodar Khaduri, Minister of Finances of Georgia, elaborated, the exempted 20% of GEL 150 that makes GEL 30 will be accumulated in the state budget along with the non-exempted part of the salary accruing to GEL 360 within 12 months. The collected GEL 360 will be paid back to the targeted group [who will enjoy this income tax preference] as so called the 13th salary by end-year.
To require the saved money back one should have a banking account, and secondly should submit a declaration with the request [on the money return] at MOF that acknowledges the fact that about 20% of the target employees may miss this chance due to bureaucratic procedures related with declarations.
Irakli Lekvinadze, an economic analyst, presumes that this will cover pedagogues mainly outside the capital of Georgia [in Tbilisi salaries of pedagogues often exceeds GEL 500] where pedagogues have quite low salaries going as low as GEL 150-300, and low-income employees at small companies.
On the other hand Lekvinadze believes the planned 2% drop in the income tax would be much better for business and economy in a long-term prospect as the exempted part of income would remain in business that might enhance economic activity, create more jobs and boost national economy at large. But in a short-term prospect the benefit of the 2% drop in the income tax would not be tangible for employees as Georgian experience shows: when the ex-power revoked 15% of social tax and reduced the income tax from 25 to 20% very few companies increased salaries and enhanced business activity. Some economic analysts think the reason business did not do this was the political crackdown on business. It is an open secret that National Movement, the ex-ruling party, pressed on business to finance multiple political activities and latent expenses of the government apart of official taxes paid in the state budget.
Soso Archvadze, an economic analyst, agrees that Georgian businesses suffered of political pressure and unforeseen huge expenses but he thinks it should be thankful it pays no social taxes paid by all businesses globe over the rate of which is much higher the 15% paid by Georgian entrepreneurs. Moreover, based on profit tax data, Georgian business creates around GEL 6 billion per year out of which only GEL 900 million is paid as a profit tax and the remainder part stays in business.
“Business might use this around GEL 5 billion to enhance its activity and let it do this now,” Archuadze told GJ. “We cannot afford better social-care and reduced taxes.”
He approves the idea to adopt income tax preference on subsistence minimum rather than drop 2% of it as the ex-government built in the tax code.
“Revenues taken from income tax in the state budget exceed the profit tax incomes by 80-90%. Income tax collection [in 2011] made roughly GEL 1.6 billion and a 2% drop might decrease its figure by GEL 160 million and state budget cannot say no on this. Meantime due to exemption of only subsistence minimum the budget loses around GEL 110 million,” he explains and finds this new initiative a precondition to go on more progressive taxation of income-the differentiated step-taxation practiced in the US and UK meaning that the higher is income the higher is taxation rate.
Paata Sheshelidze, President of Free Economic School, thinks the offered untaxed subsistence minimum mechanism looks quite encumbering for administration, discomforting, nontransparent, and very much alike yield-free crediting of the state. Besides it may boost deals between employer and employee over the salaries part of which may go in shadow.
“First of all, it needs additional administration resources and money to hire people at Revenue Service to calculate this new kind of exemption taxation that the state cannot afford. Besides the monitoring process, it will be difficult to keep an eye on how money is deducted from accounts. Moreover, most of the people who get less than GEL 500 salaries in petty business have no banking accounts; how are they supposed to enjoy this tax preference? And why people should wait a year to get their money back? Let them pay the exempted money each month, may be they will change their mind in a year. It looks like the state takes my money as a yield-free credit during a year,” Sheshelidze said.
He believes the simple reduction of the income tax by 2% would be much better.
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