Finance Ministry snubbed the new SME law
30 December, 2010

Georgian government does not view the law on small and medium business as a priority at the moment and therefore, the current law regulates the problem. But the current law includes controversies that lead to taxation disputes and confusion.
It is an open secret that Georgian economy is based on the big business while the entire developed world acknowledges SME to be a driving force of any economy. The US and EU authorities stimulate the sector. Accordingly, SME makes up

about 80% of US economy and 60-70% of EU economy while this segment makes less than 20% in Georgia.
Unlike the civilized west, Georgia still lacks a proper law regulating the SME sector. The tax code and law on foreign investments that regulate SME at the moment is so controversial that it puzzles business and scares investors off.
To streamline the legislative defects and regulate SME sector effectively, Georgian SME Association (GSMEA) worked out a new law focused on SME sector and based on the best international practice, which is tailored to Georgian reality.
However, prior to submitting the draft law to the parliament [as a legislative initiative] authors of the initiative sent the paper to the executive power last October to feel the ground. The answer was “no” from the Ministry of Finances (MOF); the Prime Minister’s office still delays the answer, and the Ministry of Economic Development (MOED) promised to discuss the SME law initiative  with the authors some day.
Levan Kalandadze, Executive Director of GSMEA, thinks that the government very likely has not made an in-depth analysis of the draft law as conclusions provided by MOF were superficial. MOF informed that introduction of the new state regulations stimulating the SME is not a priority at the moment as the sector is well-regulated by current law.
But this law includes outrageous discrepancies that cause confusion and taxation disputes rather than promote transparency in the sector. Tax code and law on foreign investments provide different mutually exclusive definitions of small and medium business.
According to the tax code, only physical law entities with less that annual turnover of GEL 100 thousand are defined as small business and enjoy tax preferences. The definition does not include legal entities. Accordingly, small bakery with turnover of GEL 100 thousand is taxed as a big industry like Heidelberg Cement [for example], which is extremely unfair, Kalandadze believes. The law completely lacks definition of middle-sized business. And it turns out that all business with the turnover of more than GEL 100 thousand is either middle or big.
On the other hand, law on foreign investments stipulate that enterprises employing maximum 20 people and with the annual turnover of GEL 500 thousand are defined as small; enterprises employing maximum 100 persons and with the turnover under GEL 1.5 million are  medium, above these limits is big business.
It is up to tax officers to define the size of the enterprise actually. This makes entrepreneurs to feel discriminated.
“Thus investors face a big puzzle,” Kalandadze explained to Georgian Journal. “When they enter in the country they read the law on foreign investments first of all and when they enter the country they find out that the tax code treats them differently and confusion follows.”
To streamline this controversy GSMEA proposed to define all businesses [except joint stock companies] with annual turnover under GEL 2 million as small. Kalandadze thinks that even this turnover is too insignificant as far as in Europe businesses with the turnover under EUR 10 million are defined as small.
“However  MOF grounds its refusal upon an argument that enterprises with turnover up to GEL 2 million are small business based on the current law and introduction of new special stimulating regulations is not reasonable at the moment. Therefore they do not support this law,” Kalandadze said.
MOED did not shape out its position as yet. On December 15, 2010 during the meeting of Georgian business with Vera Kobalia, Minister of Economy,  Georgian Business Association asked her about MOED approach toward the SME law and she did not turn it down in fact.
“She said that we need to meet to discuss this draft law and let’s see what happens,” Giorgi Isakadze, President of GSMEA, told GJ.

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