BUSINESS
IT zones lag behind expectations
03 March, 2011

Identity status for Georgian IT Zone exempting Georgian export-oriented IT companies from profit and Value Added Tax is defined and available for acquisition. But IT companies do not rush to swoop on it as yet. Neither expect they a boom of foreign investors due to the proposed taxation preferences for IT zones.
The IT zone entity status criteria entered into effect on February 15, 2011 shortly after the law on IT zones was enforced staring January

of this year. Ministry of Finances (MOF) assures that the interest for IT zone status is big and is supposed to increase gradually. But only 10 companies appealed the MOF with the request to rank them as IT zone entities as of yet. However only 5 applications were approved, 4 were turned down and one is under discussion at the moment. MOF assures that granting of IT zone status takes just 48 hours instead of 10 days acclaimed initially.
According to MOF, the law on IT zones is focused on boosting IT business in Georgia by creating market demand and attraction of foreign investments in the sector. Entrance of big IT giants is supposed to have spill-over effect and develop the sluggish IT education by training local personnel.  
But the sector pundits seem disappointed for instead of initially proposed complete zeroing taxes to IT Zone entities the preferences covered Value Added Tax (VAT) and profit tax alone. Zeroing of the income tax charging by the biggest rate of 20% that was expected to make a breakthrough in Georgian IT sector remains unchanged.
According to sector pundits, income tax makes 70-80% of companies’ expenses and exemption from it could really attract international IT fames to Georgia, but without this preference nobody is expected to rush here.
“The profit tax exemption is not crucial for me as we have little profit, that’s why we do not seek for the IT zone status” Giorgi Gordeladze, a spokesperson of Saatec, a Tbilisi-based software development company oriented on export, told Georgian Journal. “It would be better to exempt us from income tax; income tax preference is the most substantial to IT sector, salaries in IT sector increased significantly lately and there is not as cheap labor force in Georgia as in other countries like India for example. That’s why Georgia is not competitive at international market. And zeroing of income tax would be crucial to attract investors here. ”
Jarji Maare, Head of iTex International, an export-oriented software company, claims on inadequate governmental policy and insufficient support to IT sector.
“Armenian government has established a ministry of IT sector six years ago and Armenian IT companies contribute about USD 40 million to the state budget, while nobody cares for IT sector in Georgia as if it is insignificant,” he told GJ.
Figures provided by MOF seem less impressive than Armenian ones and bespeak on Georgia’s high dependence on import. GEL63.402 million worth IT technique was imported in Georgia in 2010 that is three-fold reduced compared to 2009. The software import accounted for GEL1.986 million last year while it was GEL 3.203 million in 2009. The export of software programs increased meantime: in 2010 it accounted for GEL 9 114 compared to GEL 6938 of 209.
According to Maare, one of the key problems in Georgia is absence of high-level education system. Georgian IT geeks are self-educated in fact. And irrespective this fact Maare believes that abolishment of income tax could attract big international IT companies to enter Georgia.
“I assure you if the income tax were zeroed there would have been a boom of foreign IT companies in Georgia; they would have moved their offices here and the income tax-based budgetary losses would be compensated many-fold. But if we do not offer them conditions better than in their countries why they are supposed to come here?” he said adding that he prefers not to seek for IT zone status as of yet till details of the taxation preferences  are clearer.
Irakli Tushishvili, Director Executive of Alta Software, local IT company that has already acquired IT zone status, believes exemption of IT export from profit tax is the first step undertaken by government and other positive moves will also follow.
“It gives an impetus to the companies that were not oriented on export to develop this direction. We have not been exporting our product as yet, were delaying this by tomorrow, but now this here initiative entices us to take bigger interest in export and think of it today,” Tushishvili said. He does not expect boom of foreign investors however as expected before when the IT law was supposed to zero all taxes.

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