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The concept of micro business in Georgia
By Messenger Staff
Monday, June 7
The new taxation code which has recently been widely promoted by the Government introduces many novelties. For instance, the term 'micro business' will now refer to those companies whose annual turnover does not exceed 30,000 GEL. They will be exempt from profit tax.
The Government says that this will be a serious advantage for these businesses, but many analysts challenge this, saying that if annual turnover is 30,000 that means GEL 2,500 monthly and GEL 83 daily. If a person sells and buys items for GEL 83 a day he will possibly have no more profit than GEL 5 a day and this is just a ridiculous figure.
Furthermore the micro businesses must register and are obliged to have official cash registration machines, because if they do not have one they will be accused of hiding their income. However some businessmen could register several such entities and keep each one under 30,000 turnover but in fact have a much bigger total income.
Revolutionary Code Innovations
Monday, June 07, 2010
The Georgian government has introduced a new tax code, which is expected to come in force at the beginning of next year. Prime Minister Nikoloz Gilauri says the new tax code, which represents a consolidated tax and customs codes, is to ensure maximum legalization of the business activities in Georgia. The code is still being drafted and the government is ready to incorporate the business sector's proposals and remarks into the bill. However, certain entries of the code will be enacted as early as September 1.
The Georgian government has a long history of foisting its initiatives on the public in a surprising manner. A number of representatives of the Georgian business sector have outlined their considerations and approaches to the expected fundamental changes and revisions in the new tax code. In interviews with Georgian Business Week, they noted the new law could improve relations between the private sector and the tax authorities.
The tax code has been virtually rewritten.The new tax code introduces such concepts as a micro business and a small business. Companies with turnover of about 30,000 GEL will be considered to be a micro business and they will be exempted from all taxes, while companies with turnover of 30,000 to 200,000 GEL will pay a fixed rate of the company's gross and the tax rate will range from 3 to 5 percent.
Under the current tax code, companies that gross more than 100,000 GEL are to pay a value added tax (VAT).
One more innovation of the new tax code enables companies to pay VAT on a quarterly basis. Lawmakers note the practice should be considered to be a certain kind of interest-free state loan for the private sector. The norm will be initially applied to the major business and will be gradually expanded to other business companies too.
The new tax code also calls for introducing of an auditing board, which will be chaired by the Georgian finance minister. The auditors will be empowered to react to illegal activities of tax inspectors in relation to the business sector. The board will include five members and discuss appeals of the companies, which claim they are improperly or unfairly taxed.
Under the bill, the amount of penalty sanctions will also increase. Tax rates will rise for gambling business and alcohol manufacturers, while winemaking companies will pay the previous rates. Taxes will not increase for the print media or agriculture businesses.
Moreover, the new tax code calls for introducing the position of an ombudsman to protect private sector's interests. Namely, entrepreneurs will be allowed to write off unsaleable products. The business sectors representatives positively appraise the tax code changes.
“The code will essentially change its principles, first of all, to simplify relations with administrative structures,” said Georgian Finance Minister Kakha Baindurashvili. “The practice of a preliminary decision is used in the developed counties and it is of crucial importance for any investor. The code also introduces the concept of an honest taxpayer, under which honest taxpayers may be freed from sanctions in case of error. In practice, the code differs errors and deliberate crimes.”
Amy Denman, executive director for the American Chamber of Commerce (AmCham) applauded the move. "The new tax code includes such a modern regulation as a preliminary decision. Namely, the answer the Finance Ministry will give to the question of a businessmen will be legal and this amendment is of crucial importance for the business sector,” she said.
Soso Pkhakadze, chairman of the Wissol supervisory board and vice president of the business association of Georgia also praised the move. He said: The new tax code calls for imposing a turnover tax on this category and the tax rate makes up 3 to 5 percent. The companies having failed to submit full bookkeeping documentation will have to pay a 5 percent turnover tax, while companies will pay only a 3 percent turnover tax if they submit over 60 percent of required bookkeeping documents. Under prior practices, the ministry-forwarded letter was of advisory nature and it did not protect the taxpayer. Consequently, the business sector will be able to rely on the letter and the tax office will not be authorized to revise the company decision and impose penalty sanctions and fines.”
The main characteristic feature of the new tax code is emphasized in a new and reasonable approach of the Georgian government to the business sector, said Lasha Papashvili, chairman of the Bank Republic supervisory board. He points out the entry, which envisages pardoning errors and removing penalty sanctions in case of decisions over unclear situations, is of crucial importance. Papashvili says the Georgian Finance Ministry's offer to register all financial operations in the united server of the ministry in case of corresponding desire is quite acceptable. As a result, businessmen will spare time and solid funds, he noted. However, one should also note if the company operations are registered in the Finance Ministry server, the company will be exempted from periodical one-week audits, not from complex audits. At the same time, the new tax code will not lower profit tax until 2012.
Government drafts new tax code and says small business a priority
The government has drafted a package of changes to the tax code in order to help improve the business environment in the country. The revised code has been put in public scrutiny last week. It is expected some articles to come into force this fall, while the whole code will be start working Jan. 1, 2011.
“We want to hear voices of all interest groups,” Minister of Finance Kakha Baindurashvili told journalists on June 9. “The 6-man groups of experts are working on development of the draft. This group is assigned to take all the comments into account.”
The key advantages of the new code are the simplified procedures, clearer stipulations, more business friendly regulations and introducing helpful environment for small business owners.
The new code introduces notions such as micro entrepreneur and small entrepreneur. “An entrepreneur with annual turnover of over 30, 000 lari is a micro entrepreneur, who must pass registration procedures in the tax department to receive this status and he will not have to pay any taxes,” PM Nika Gilauri underlined, as he presented the draft code to the business community on June 3.
The preferential regime will also benefit those businessmen whose annual turnover exceeds 200,000 lari. These entrepreneurs will receive a status of a small entrepreneur and will pay only a turnover tax ranging between 3 percent and 5 percent. “If a businessman has a high performing accounting, he will pay 3 percent and in the other case – 5 percent of the turnover.”
Also, under the draft code, monthly payment of VAT is replaced with quarterly payment. This, according to the government, is very important re-investment opportunity for business people, which will boost the economy. “Previously, we could not afford to make this kind of change but now our economy can allow to offer this opportunity,” Baindurashvili explained.
The new tax code merges customs and tax codes in a bid to help further simplify the procedures. According to the authorities, now businesspeople will have to deal with only one low, instead of the two. Allowing business owners to use excessive tax payment for clearing other tax obligation or request the money back is a significant step forward. The tax service is obliged to return the money within three months. Under the present code the relevant procedures are much more complicated. For instance, it sets a period of one month for a business to request the sum.
Georgia’s tax code underwent many amendments several years ago. As part of the liberal economic reforms, the new tax code came into force in 2005 and two years later the new customs code was approved. As a result of the reform, only six taxes remained instead of 21, and out of the 15 customs procedures, only seven were left. These changes eased the overall tax burden, made collection simpler and more transparent and corruption-free. However, local experts and representatives of businesses have repeatedly pointed to the remaining faults regarding the taxation system, including the threat of double interpretation of quite many articles.
Now, apart from using clearer language and allowing simpler tax paying procedures, the amended tax code will introduce two new institutions which will serve the interest of businessmen. These institutions will be the Tax Ombudsman and the Auditors Council. The latter will be authorized to give or not give permission for tax authority to fine a company which had no tax abuses previously. This is to encourage businesses to function decently.
Details of how these two bodies will get financing and whether they will be independent structurally have not been disclosed yet.
Very good news is to give entrepreneurs the right to write off outdated or rotten products. The absence of such a permission used to complicate things for companies.
While attempting to elevate tax burden for small business, the government will increase the burden for large tax payers to compensate the potential loss in the budget. For instance, excise taxes are poised to increase. “We plan to increase axcise tax on scrap metal, gambling business and alcoholic beverages, mostly on vodka,” Baindurashvili said.
According to Baindurashvili, the Georgian budget has a 6 percent deficit and the government plans to make it 3 percent. “We can not allow declining tax revenues because it is very crucial for the country’s economy,” he added.
The most unpopular news for the tax payers will be the government’s decision to shelve a plan of further reducing income and dividend taxes. Under the current tax code, starting from Jan. 1, 2011 income tax is to cut from 20 percent to 18 percent, while the dividend tax, which is now 5 percent is to be annulled. Now the government, in its efforts to compensate beneficial conditions for small business, is posed to reschedule the tax cuts until 2013.
Story by Nino Edilashvili
Last edited by Kokoity; June 11th, 2010 at 06:53 AM.