When exempted from Value Added Tax this March Georgian agriculture and meat products are supposed to become competitive against the import and prices will go down, Georgian government believes. Skeptics expect only slight changes for the preference covers few businesses.

Primary production and provision of agriculture product and meat [both fresh and frozen] produced in Georgia is exempted from 18% Value Added Tax (VAT) with the input VAT deduct right before the questioned product reach processing chain.  President of Georgia signed

Georgian authorities expects Georgian agriculture product’s competitive power to increase and be on equal conditions with the import as an aftermath.

“Until this legislative amendment agriculture product produced in Georgia was not attractive to distribution companies and trade networks. They preferred imported agriculture product for from taxation point of view trade by imported product was much profitable. Thanks to this here change agro-product harvested in Georgia is equalized with its imported analogue. The new initiative on the other hand will facilitate to agriculture development sector and what is the most important Georgian peasant and farmer will be able to sell the product out, get bigger profit and enhance their production,” Manana Manjgaladze, Spokesperson of President of Georgia, stated out on March 20, 2012.

The point is primary provision of agriculture product under GEL 100 thousand of annual turnover has always been VAT-free in Georgia but without the input VAT deduct right thus increasing expenses to distribution and trade networks that had to pay VAT on product provision but the payment was not deducted from their expenses.

This here VAT-exemption covers all agriculture product [and meat] producers irrespective turnover benchmark. According to Rusudan Kemularia, Deputy Minister of Finances, the change exempts not only primary provision but also further delivery of the questioned product until its processing and, what is very important, with the input VAT deduction right. This kind of VAT exemption is supposed to boost the agriculture sector for producers of agro-and-meat product as well as distributors and trade networks will save 18% VAT expenses.

On the other hand the VAT revenue will reduce in the state budget but not dramatically, Kemularia explains as far as the saved money will remain in economy and help business to enhance activity.

According to  Zurab Butskhrikidze, Deputy Head of Budget and Finance Committee at Parliament, the VAT exemption should cut down prices for it will foster agriculture sector generally and particularly the now VAT-payer enterprises will save money.

“All this will cut down prices and both farmer and consumer will be happy to me,” he is reported as saying by GHN news agency.

All who can be happy will be trade outlets and distributors but not petty farmers and consumer Levan Kalandadze, an economic analyst, believes for doubts that traders and distributors will enhance their profit margin rather than cut down prices.

“There is no such practice at Georgian market to reduce profit margin, take oil prices for example. They never reduce here when Platts reduce prices,” he elaborates and expects no increase of competitive power as well as output of Georgian agro sector in result of the VAT exemption.

“To be competitive and have an influence on prices one should increase production that is scarcely available for unlike importers Georgian farmers have neither logistic skills nor money to acquire new technologies for development,” Kalandadze explains. He approves the VAT exemption within itself but finds it premature.

“One should create incentives to production increase first and then make VAT preferences for there are few to enjoy it,” he said.

Most Georgian economic analysts share his approach. They do not expect big changes for VAT-payer agriculture businesses who can enjoy the exemption take miserable market share.

“I do not expect any big effect on the overall price-making or agriculture sector development, “Irakli Lekvinadze, an economic analyst, said. According to him, the change will be profitable to VAT-payer big enterprise like large green-house enterprises and meat producers with over GEL 100 thousand turnover that are quite few at our market. Petty farmers who make the overwhelming majority of local agro-product are already exempted and the change makes no difference to them. And the small portion of now exempted businesses cannot offset import infesting Georgian by nearly 90% that is twice cheaper irrespective the import-related tax and transportation costs and dictate market prices.

Shota Murghulia, an economic analyst with the Center for Strategic Research and Development, thinks that the change should occur in two weeks hence the change is already inactivated but expects very slight price drop for similar reason as his peers: only few big businesses both producers and traders may enjoy the profit.

“Only big supermarkets and hypermarkets like Goodwill and Populi have over GEL 100 thousand turnover in Georgia. It is small groceries and grocery sections at small supermarkets that handle with agriculture mainly and they are already VAT-free. The same is with petty farmers-no profit either. On the other hand input VAT deduction right is a good change but VAT does not define all business expenses especially in farming where the key expense comes with labor force,” Mughulia elaborated.

Lekvinadze believes if instead of separate VAT preferences government had cut VAT’s 18% rate down by at least 3 points it would have brought much bigger effect in the entire economy not only in one sector.