Untaxed subsistence minimum resembles financial pyramid
06 March, 2014
Untaxed  subsistence minimum resembles financial pyramid
The untaxed subsistence minimum of salary will be returned to around 600 000 employees in Georgia starting April 1st. The Ministry of Finance of Georgia concluded a memorandum on partnership on February 24 with ten commercial banks to insure a flawless return of the taxation preference for the targeted group. However, the taxation preference itself is far from flawless, economic analysts say. They do not deny that the preference is somewhat progressive as alleviates less well-off citizens, but it looks
very much like a financial pyramid.
In January of 2013, the government introduced the so-called untaxed subsistence minimum in the income tax legislation to aid low-income citizens whose monthly and yearly income does not exceed GEL 500 and GEL 6 000 respectively. As a matter of fact, the previous power built a 2% drop in the income tax [that is the highest tax rate making 20%] starting from 2013 for everybody, but the new authorities preferred to render preference to a more socially-oriented taxation : it exempts the subsistence minimum equivalent sum of GEL 150 in the income tax to less well-off citizens.
However, the preference mechanism is pretty intricate. It does not leave the exempted 20% at the disposal of beneficiaries immediately, but returns the accumulated sum after a year. Once the year of 2013 passed, repayments can be made. To receive their exempted sums, beneficiaries will have to submit an electronic declaration and bank requisites on the Revenue Service web-site www.rs.ge and the sum will be returned automatically. The maximum exempted sum accrues to GEL 360 per person in 12 months and inasmuch the targeted privileged group embraces about 600 000 in the country, the state will roughly have GEL 216 million of interest-free financial resources at its disposal throughout a year. Therefore some analysts presume the suggested taxation preference in fact comes in handier for the state than for the beneficiaries.
The fact that the exempted money is only returned after a year and not immediately on a monthly basis in parallel to the tax payer paying its due each month makes Paata Sheshelidze, President of Free Economic School, thinks the exemption is very much like a financial pyramid funding the state. Moreover, he esteems the mechanism is quite encumbering regarding administration which will require extra personnel, is discomforting and wasteful. Frequently, people with a monthly salary less than GEL 500 have no bank accounts and they will have to open one while the state should spend extra money on commissions paid to the banks which will implement the money return process. The monitoring process of the preference deduction includes non-transparency risks. Furthermore, it may boost deals between employers and employees to pay part of the salary as black money escaping full taxation. Sheshelidze thinks the planned 2% drop would have been much simpler and fairer.
Giorgi Tsimintia, Head of the Association of Young Economists of Georgia, also believes the untaxed subsistence minimum may encourage a shadow economy and discourage the motivation for higher salaries. Besides, it is unfair. According to the tax code, the income tax is taken from the total income that consists of three components as salary, income from economic activity and other sorts of income. However, the tax exemption covers only salary, thus discriminating the people who are unemployed but get similarly low incomes from other sources. An employed person with a GEL 500 salary who has a house for rent may enjoy the untaxed minimum preference and the rent profit, while an unemployed person who has no other income than that GEL 500 rent profit will not have that privilege. “The law should be amended and taxation preference must cover all incomes,” Tsimintia said.
He also indicates that the untaxed minimum takes off the motivation to ask for higher salaries.
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