Technical-loss-tax- exemption is discriminating
12 May, 2011
Technical-loss-tax- exemption is discriminating

Georgian way of tax-exemption of in-process losses poses discrimination risks. Instead of establishing general standards for tax-free waste Georgian tax service adopts a payable, volunteer-based model tailored to each company separately, and scarcely affordable to small business. 
Taxation of technical losses has long topped the rap sheet list of Georgian taxation system. The point is that Georgian tax law charged processing and industrial sector without taking into account in-process waste that affected the business expenses and jacked prices up.
For

instance if a flour-mill grinds 100 kilogram of corn the actual weight of the produced flour will be about 95 kilogram not 100 kilogram. However Georgian tax officers charged mills as if they produced and sold 100 kilogram of flour.
Also oil and oil product transportation companies claimed they faced natural losses for the oil and oil product lose at least 20% due to evaporation while tax officers charged them as if they sold the imported product without a drop in volumes.
Business has long been requesting government to adopt a practice of the civilized world deducting the in-process losses during tax-calculation but government was dumb to this voice for it was a guaranteed method of fulfilling the state budget.
However, after trumpeting a new business-friendly economic course in frames of which Georgian government came out with sundry initiatives allegedly easing the business-life in the country, government acknowledged in this past April that the technical loss was the top problem to both big and small business alike and voiced its good will to exempt them from taxation.
According to Revenue Service, cap quota of in-process losses will be defined by a special governmental commission headed by Minister of Finances. The Commission will define only natural loss cap quotas while the Revenue Service will be responsible for outlining the marginal coefficients of in-process losses of industrial and manufacturing enterprises, the actual profit of products as well as regulation of technical norms related with processing sector.
“This has been a very large-scale problem pestering both big and small companies,” Nika Gilauri, Prime minister of Georgia, stated at the meeting of the Revenue Service and business people on April 13, 2011. “Now we will create a special commission of technical losses and   it will define [possible] volumes of technical losses of this or that sector…and when the tax inspection will check the company it will take into account these volumes.”
But the administration scheme of this good will seems discriminating and far from the best world practice, Georgian economic analysts say. They fear it cuts much ice with big business rather than the Small and Medium Sized Enterprises (SME) - the sector been always neglected in favor to bigger players in this country. The point is that the Commission service is volunteer, costs expensive, and the marginal coefficient of losses will be defined not generally per sector but per company.  Neither the Revenue Service nor Prime Minister disclosed the price for the volume-calculation service, but economic analysts suppose that it cannot be cheaper than several thousands in national currency. 
“First of all the calculation of exempted volumes should not be payable for the Revenue Service is a state-budget based organization, well-paid and it should not take extra money for the service it ought to implement.”Levan Kalandadze, an economic analyst, said.
Secondly, it is discriminating. It seems unreasonable to calculate loss coefficient separately to a big mill and a smaller one if these two are equipped by similar technique of similar productive capacity. The individual approach may lay ground to discrimination of small companies that can scarcely afford the costly Commission service.
However the preferential position of big business also is comparable. On the other hand this kind of payable tax-exemption kills the idea of tax preference that ideally is focused to cut down unreasonable business expenses. It puts out no palpable choice in fact for business has to extend unreasonable outlays either through unfairly charged taxes or through the fairly calculated Commission service bill. The latter seems the big business privilege. This kind of volunteer and paid-in tax-presumption seems cosmetic and rather in favor to government than to business. Government very likely hates losing a guaranteed tool of keeping the state coffer full. Experts believe the tax-exemption idea must be free, based on common standards covering sectors without exception  and not tailored to each company separately.
“All developed world practices equalization standards,” Davit Narmania, Director Executive of the Center for Economic Problems Research, told Georgian Journal. “Otherwise it is a little bit discriminating when you deduct losses only after a company appeals for assessment loss volumes [for pay]. There must be a mechanism that writes off losses without any appeal. Many countries exercise standard-systems and write off technical losses based on it. We must adopt these international standards to exclude any kind of subjective approach.”

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