Tax legislation remains imperfect
07 October, 2010
Tax legislation remains imperfect

The new tax code that was excepted to be revolutionary, repeats old blemishes: the key demand of business to implement the presumption of innocence of tax payers is still ignored, double interpretation and subjectivism still remain.
The new tax code that had been discussed during last summer was approved by 73 votes. Oppositionist MPs did not support the law.  The new tax legislation was supposed to be radically different from the old and notorious tax code. But instead of revolutionary

approach trumpeted by the government all summer long, the code proposes tepid changes. The key demand of business to incorporate the idea of presumption of innocence of tax payers in the legislation [in case of ambiguous disputes], remains unheeded. Meantime the most striking defects of the old code -subjectivism and double interpretation - remain and without presumption of innocence of tax payers, create ground for violation of rights of tax payers.

According to Kakha Baindurashvili, Minister of Finances of Georgia, the new tax code is drafted on the basis of the international experience and comprises many novelties that will create the beneficial environment for conduct of business and the entrepreneurship. The novelties are the institute of the Taxation Ombudsman, legalization of the business and classification, the new regimes of the taxation and lessening the taxation burden.   All possible business including small, medium and big businesses are supposed to enjoy preferences, Baindurashvili said during the plenary session at parliament. 
Economic analysts say the new code is better than the old one but not as much as expected. The key promise of government to reduce the benchmark of Value Add Tax (VAT) payers was not kept.  The first version of the draft tax code having introduced definitions of micro and small businesses proposed to define the business with annual turnover less than GEL200 thousand  as small and exempt it from VAT. According to the old tax legislation, business with the annual turnover of GEL 100 thousand had to pay VAT. However government changed its mind in the end and decided not to increase the benchmark for VAT payers from GEL 100 thousand to GEL 200 thousand. The governmental explanation is that it included risks, namely that big business tempted to elude VAT might separate its business into smaller fractions.

According to Zurab Melikishvili, the Chairman of the Committee on Finance and Budget, the decrease of small business margin was agreed with the business, as far as in the opposite situation the country would have missed on the significant revenue and that would have fostered economic downfall.
Davit Narmania, an economic analyst with the non-governmental Centre for Economic Problems Research (CEPR), believes government cared to insure bigger budgetary incomes by detaining the old small business benchmark in fact as in case of increasing the VAT payers’ benchmark to GEL 200 thousand the taxation area might shrink affecting the state budget. 
Levan Kalandadze, Executive Director of Association of Georgian Small and Medium Enterprises, worries that definition of micro business includes hidden bombs.  According to the new tax code, if annual turnover of a physical entity does not exceed GEL 30 thousand it is a micro business and is exempted from taxes. Kalandadze stresses that the law does not cover legal entities including Ltds [that make the bigger part of small business in the country] even if their annual turnover is under GEL 30 thousand, that discourages small business development actually.
“It comes out that a small bakery Ltd with GEL 30 thousand of turnover and a big business like a metallurgic factory will be taxed equally,” he explains.

Moreover, economic analysts disapprove the extension of the tax base. Government imposes excises on communication sector and the excise rate doubles on spirit. Moreover, the income tax rate increases from 18% to 20% and the profit of dividends that was supposed to be exempted from tax starting 2012, will be taxed by 5% till 2014.
There are many question marks that are supposed to be streamlined via secondary legislation over which government promises to work with business by the end of this year prior the new code enters into effect on January 1st, 2011.  
“This is no revolutionary tax code, it is not even an evolution paper, it proposes just slight changes that did not demand creation of a new code, and we could just amend the old one. And if works on secondary legislation are supposed to go on by the end of this year why the tax code was approved in a slap-dash manner? Where do we hurry? It also might be approved later so as to make all question marks clear,” Kalandadze told Georgian Journal.
Narmania assesses the governmental approach as positive nevertheless for first time Georgian government co-operated with the business sector including both small and big ones as well as with independent experts and took their opinion and consultations into account. He hopes that works over the secondary legislation will be continued in similar way and the tax legislation will be better after all.

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