Fixed Tax Rates And Undefined Terms
12 January, 2012
Fixed Tax Rates And Undefined Terms

The long awaited fixed tax entered into effect in December of 2011,  however it cannot work as yet for the exact rates and terms of the fixed tax are to be defined by January-end.
“The fixed tax is effective actually as we approved it together with the changes to the tax code last December, but the rates of the tax as well as terms which the entrepreneurs should fulfill  exactly will be defined by the government in its enactment that

should be approved by the end of January,” Lily Begiashvii, Deputy Head of Revenue Service of Georgia, told Georgian Journal.


What is known at the moment is that fixed tax will be an alternative taxation form for small entrepreneurs who may choose between ordinary taxation and preferential fixed tax that creates an opportunity to exempt business from bookkeeping and Value Added Tax (VAT).
According to Jaba Ebanoidze, Head of Revenue Service of Georgia, the fixed tax will work through two models. One model will cover small entrepreneurs who provide service to physical entities alone and not corporations. If entrepreneurs choose fixed tax they will be exempted from cash-registers and bookkeeping obligations. They will be taxed by fixed tax monthly or quarterly. Tax rates will be defined in accordance with the business profile and location. Tentatively businesses in service sector like beauty salons or car repair workshop and small bakeries are supposed to enjoy such taxation.


Small entrepreneurs in trade sector that provide service to physical entities alone may enjoy another model of the fixed tax since they have no obligation either to write taxation-related documents to legal entities [to describe corporate expenses in the paper].
Such petty traders will be taxed by 3% of their turnover as well as face an obligation to have cash-registers to enable calculation of 3% tax. Although, they will be exempted from bookkeeping and extra expenses to hire bookkeeper, Ebanoidze believes.
One more preference that entrepreneurs of the both categories can be exempted from the VAT and remain as fixed tax payers even if they cross the GEL 100 thousand of annual turnover benchmark that in compliance with Georgian tax code obliges entrepreneurs to become VAT payers.


The reason government decided to go on the preferences of fixed tax having been requiring by small business for many years to no avail is that changes to the tax code that enacted since January of the past year gave impetus to business to remain a micro business and be free from taxation [in compliance with Georgian tax code business with turnover under GEL 30 thousand is defined as a micro business and exempted from cash registers and all taxes except income tax] rather than think of developing and becoming bigger.


According to Begiashvili, introduction of micro business status caused splitting of businesses and a beauty salon for example that generally used to be legal entities and companies split into chairs: each hear-dresser registered themselves as a micro business and pay only income taxes while the owner of the saloon enjoys usual income without paying taxes. 
“This deprived business of motivation to improve service and work on expansion of the business and brand-building,” Begiahsvili said. “Now the fixed tax that will be imposed per chair creates a motivation to the salon to pay fixed tax, be free of paper-work and VAT and think of business development.”


Begiashvili cannot name even average rates of the fixed tax at the moment however she believes introduction of the alternative taxation tool will boost small business to proliferate and expand. 
Economic analysts do not cherish big expectations toward the much trumpeted fixed tax as yet till the rates are not defined and terms clearly stipulated which business exactly may enjoy the preferences.
“It is a very good idea but it cannot create the health business climate generally for business development at large,” Levan Kalandadze, an economic analyst, said. “The fixed tax seems to cover service business only that may include not more than 1000-1500 people that cannot improve the overall social picture in the country for it is not designed for the business that creates product/wealth in the country but for concrete persons, therefore it cannot have a big effect.”

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