IT law disappoints local companies
30 December, 2010
IT law disappoints local companies

A law on IT Zones that was supposed to make a breakthrough in sluggish Georgian IT sector development, fell behind expectations.  Instead of proposed completely zero taxes for IT Zone entities, the preferences covered Value Added Tax and profit tax as well. The income tax exemption, which was supposed to be the key to IT Zone success, remains unchanged.
Last summer the government initiated a bill for creation of Free Virtual Zones for export oriented IT companies to revive the underdeveloped

IT sector by foreign investments. As Vazha Goginashvili, Head of Systems Administration Department at Financial Analytic Service of the Ministry of Finances of Georgia and one of the authors of the governmental -initiated bill, informed Georgian Journal in summer the quintessence of the tax-free IT Zones was to zero the income tax [the highest tax charging by 20%] that makes 70-80% of companies’ expenses. Abolishment of the most burdensome tax was supposed to be the key lure to attract foreign IT giants to enter Georgia.
Other taxes were supposed either to be revoked completely or one of the taxes profit tax for example could remain but its rate was to be cut down from 12% to insignificant 3-5%. Funds raised through this 3-5% taxation were supposed to be spent on education and infrastructure development that is indispensable to insure IT sector’s success.
On the other hand authors of the IT Zone bill were proposing to build in the law an obligation for international companies to employ 70% of local people that might have a spill-over effect and cause transfer of international know-how and experience to local companies.
According to Goginashvili, income tax preference coupled with the local cheaper labor force might cut down international IT giants’ expenses by 70% that could make them be interested to invest in Georgia rather than in any other country.
“If we offer Microsoft a IT specialist for USD 15 per hour instead of USD 100 it pays to American IT specialist and plus  income tax exemption, the expenses the company spend on personnel  reduces from USD 160 per person to USD 15 per employee. Moreover, it will be the single expense [as other taxes will be also zeroed]. Generally 70-80% is spent on human resource, the company can sell the product in similar price and have a big profit margin, and ultimately the company will be interested to move production to Georgia,” Goginashvili elaborated.
Georgian IT companies have been impatiently waiting for break-through taxation changes giving them a chance to divert the tax-exempted financial resources on company development and become more competitive at the international level.  According to Georgian IT companies only complete-tax-free zones might pose Georgia competitive to other IT Zones globe over [including India, China and Singapore proposing the cheapest labor force] as other zones are not completely free of all taxes. But the approved law gave a cold shower to optimistic expectations. The law on IT Zones approved on December 15, 2010 includes only Value Added Tax (VAT) and profit tax exemptions on export that is no novelty in fact: according to Georgian tax legislation, all export is tax-free except the income tax. Only non-resident companies i.e foreign investors can be exempted from income tax in some cases that poses local companies in an uncompetitive position. 
“Government touted that it was adopting the Irish model of IT Zone that offers tax-preferences to all IT companies whether or not they are export-oriented, that actually is very successful and gives a drive-force to this sector. But actually they duplicate the Singapore model that boosts foreign investors alone on expense of local companies,” Levan Kalandadze, an economic analyst, explained to GJ.
He does not rule out that the Singapore method can bring economic profit but fears that local companies can scarcely promote themselves at international arena. Kalandadze finds the export-oriented law discriminating and believes that “If we really want to develop our IT sector we have to adopt the Irish model and give equal chance to foreign and local companies alike”.
Georgian IT companies look disappointed and say no breakthrough seems in prospect.  
“Export has always been exempted from all taxes except income tax, so what difference this IT law is supposed to make to me if it still taxes me by income tax?” Giorgi Gordeladze, a spokesperson of Saatec, a Tbilisi-based software development company, told Georgian Journal. “It would be better to retain the profit tax for example and exempt us from income tax, income tax preference is the most substantial to IT sector, no special development is supposed to happen if it is not revoked.”
Top officials of UGT, the biggest Georgian IT company that was involved in the IT Zone law working process appear optimistic. They assure the IT legislation is not finally shaped out as yet and upcoming changes will make it more consummate.
“Yes the law is already approved but the secondary legislation is still under vision and nobody can enjoy any preferences proposed by the law till the secondary legislation is not worked out, it is difficult to say something at the moment,” Ermile Suladze, Financial Director of UGT, told GJ.
The questioned law enters into effect January 1st, 2011, however  neither the status of IT Zone entities nor the status granting terms are defined as of yet. They must be defined by February of 2011. 
Some sector pundits think no IT giant is supposed to rush into Georgia even if income tax is zeroed as far as Georgia cannot provide with skilful personnel as far as it lacks IT-oriented high school system. The cultivation of computer geeks is a very expensive pleasure and no serious IT company is supposed to be that philanthropic to invest in education of Georgian greenies having no IT high-school backup.
Davit Nadaraia, Head of iTex International, acknowledges that Georgian universities do not provide with the internationally accepted IT education level, and Georgian IT sector stands on self-educated computer geeks in fact. And even tax-free legislation can have positive results in 10-15 years without development of high school system.

Print
Other Stories
Georgian citizens are granted the right to work in France
The French Embassy in Georgia made remarks on granting Georgian citizens the right to work in France
The New York Times: Bitcoin declines but Georgia still bet on it
The New York Times has recently published an article about reasons, challenges and causes of generating Bitcoin in the former Soviet country Georgia.
EU to allocate € 13 billion for Eastern Partnership countries, including Georgia
The European Union together with the World Bank plans to allocate investment worth € 13 billion for infrastructure projects in the Eastern Partnership countries.
Anaklia Port and its importance for Georgia
In 2016, Anaklia Development Consortium was authorized to launch the construction of Anaklia Port.
Cryptocurrency mining threatens electrical network in Abkhazia
In the breakaway region of Akbhazia rampant cryptocurrency mining is threatening the shaky electrical network, reports an article of the news portal EuroNet.
Caucasus Wine University to be opened in Gurjaani
In the Kakheti region a new viticulture campus of the Caucasus University is in the process of planning.
Photos describing life of the poorest in Georgia
Fight with poverty should be among top priorities of every government in every country.
Training farmers to rescue the organic hazelnut production in Georgia
Even drizzling rain and unpleasant gusts of wind can’t prevent the farmers from coming and participating in the agricultural training.
Bleak times for organic farmers in Georgia – but there is hope
Organic hazelnut production is a delicate plant in Georgia that has emerged just a couple of years ago. Various pests, among them the Asian stink bug Parosana, trouble hazelnut farmers and menace their livelihood – even before their businesses could really take off.
Hybrid car imports are going through the roof in Georgia
Thanks to their fuel economy, the popularity of hybrid cars is increasing in Georgia, where fuel affordability is low and prices for fuel are unstable.
The New Year offer from MAQRO Construction - Apartments with unbelievable discounts and the parking spaces for FREE!
Location, green yard, spaces for various needs, experience of the construction company and parking space are the main important criteria for potential buyers of apartments.
Interview with the co-founder of Kiwi Vegan Café – the first vegan place in Tbilisi
Behind the Kiwi Vegan Café stands a group of activists who wants to raise Georgian’s awareness for animal rights and welfare.
Biblusi opens first shop for tourists - Georgian
The largest book shop in Georgia Biblusi opens the first shop specially designated to the needs and interests of tourists and named it Georgian.
Georgia improves by five ranks in the Prosperity Index
In the overall Prosperity Index rankings, Georgia has climbed by 5 positions from 85 to 80 when compared to last year. As such, Georgia is the best performing country in the CIS zone.
The future is bright for electric cars in Georgia
The numerous hybrid cars in the streets of Tbilisi cannot be overlooked. Entrepreneur Sulkhan Gvalia calls them “pagers”, referring to the predecessor of mobile phones.
Georgia’s fight against the big tiny enemy – Asian Parosana
It’s a tiny creature, but the harm it did to the Georgian agriculture sector was and still is immense.
New cable route: from Kobi to Gudauri in 15 minutes
On the 15th of December, cable transport is scheduled to be opened connecting Kobi and Gudauri.
Tourist boom in Gudauri – majority of hotels are booked by foreigners
Gudauri is among the most popular winter resorts in Georgia.
Medical tourism increases in Georgia
In the last 9 months, Georgia was visited by 19 500 foreigners for medical and recovery purposes.
Doing business in Georgia has become easier than in America
According to the Doing Business 2019 report published by the World Bank, Georgia ranked 6th among 190 countries in terms of simplicity of doing business. This was an improvement over two ranks compared to last year.
Problems that foreigners frequently face in Georgia
The importance of Georgia as a tourism hub is growing year after year.
Tbilisi TV Broadcasting Tower – Better than the Eiffel Tower?
It is planned to renovate the Tbilisi TV Broadcasting Tower, one of the landmarks in the capital.
Georgian Fusion Menu by The Biltmore Hotel Tbilisi
5,895,914 international visitors have visited Georgia between January and August of 2018. Compared to the previous year the number has increased by 12.2 per cent.
Advertising of gambling and lucrative games may become banned in Georgia
Advertising of gambling and lucrative games may become banned in Georgia. Those who violate the new rule would be fined GEL 10 000.
Lebanese café-lounge Beirut opens in Tbilisi
What is necessary to organize an unforgettable event? – Fun, emotions, lots of surprises, good music and delicious menu.
PHOTO OF THE DAY
GEL Exchange Rate
Convertor
19.02.2019
20.02.2019
USD
1
USD
2.6404
2.6498
EUR
1
EUR
2.9908
2.9977
GBP
1
GBP
3.4130
3.4246
RUB
100
RUB
3.9898
4.0023
Other Stories
Recently Toyota rolled out Global Campaign under this slogan that reflects the Olympic and Paralympic Spirit of Encouragement,
A couple from Switzerland combines Swiss tradition and technology with Georgian products. Their cheese is made in the Georgian mountains and sold in local stores and hotels.
It has been more than five years since the residents of Lilo village, near Tbilisi, cannot open their windows.
63 000 GEL was received by the Georgian Agro Export Group which is just a small part of the European Neighbourhood Programme for Agricultural and Rural development.
Georgian entrepreneur Guka Tavberidze, who runs his own business in the UK and does it quite well, has been invited by BBC
The grand opening of 7-star The Biltmore Hotel Tbilisi took place in Georgia’s capital on July 31.
DUSHETI, Georgia – The Georgian government and the World Bank will allocate USD 5.6 million (12 million GEL) to fund
A new Georgian clothing brand named Person has emerged in Georgian market.
Georgia is in the midst of an economic maelstrom, Euronews reports.
Situation at Georgia’s mineral water market is interesting: over the last year, the volume of export has grown by 56 percent. According to “GeoStat”, over $114 million worth of mineral water was sold
GEL Exchange
USD
1
USD
2.6498
EUR
1
EUR
2.9977
GBP
1
GBP
3.4246
RUB
100
RUB
4.0023