Excise taxes must be paid up to the 10th of the next month after carrying out the taxable transaction. The taxable transaction for products produced in Georgia is considered to occur at the earlier of 90 days from the delivery (transfer) of goods or the moment of payment. In the case of imports, the taxable transaction is considered to occur at the time the goods are imported, and the excise tax is collected by customs agencies. For excisable products subject to excise stamping, the taxable transaction is considered to occur at the time the goods are delivered, and the total amount of excise must be paid upon purchasing the stamps. Excise stamps are required for most imported and domestically produced alcohol products and tobacco products, except for pipe tobacco.
For goods produced on the territory of Georgia, the amount of the taxable transaction is the payment received or to be received by the taxpayer from the customer, excluding the amount of the excise tax and VAT. This amount cannot be less than the wholesale market price excluding the excise tax and VAT. For goods sold at the retail level, the amount of the taxable transaction is the market price of the goods at the wholesale level not including the amount of the excise tax and VAT. For alcohol products, the amount of the taxable transaction is based on the volume of alcoholic beverages. For imported goods, the amount of the taxable transaction is the customs value of the goods determined in accordance with the customs legislation of Georgia (but not less than the wholesale market price, excluding the excise tax and VAT) plus the amount of duties and taxes payable on the import of the goods (except for the excise tax and VAT).
Property Taxes. Georgian enterprises, branch offices, and other similar subsidiary enterprises that have an independent balance sheet and settlement account, foreign enterprises operating through a permanent establishment, and organizations whose property or part of property is used for economic activity must pay property tax.
Property subject to this tax includes fixed assets, installed equipment, uncompleted capital investment, intangible assets that are listed on the balance sheet of an enterprise, as well as such property listed on the balance sheet of an organization and used for economic activity. For foreign enterprises, only property connected with the permanent establishment of the enterprise is subject to property tax.
The property tax rate is 1 percent of the value of the property. The tax is due in four equal payments, before February 15th, May 15th, August 15th, and November 15th.
Tax on the Use of Land. Physical and legal persons who are owners or users of land plots, including land used for agricultural and non-agricultural purposes, are subject to tax on the use of land.
The base rate of the tax for the use of nonagricultural land is 0.24 GEL per square meter of land. This tax is due in equal parts before August 15th and before November 15th of the reporting year.
The base rates for agricultural land are set on a per hectare basis and vary depending on location and use. This tax is due on or before November 1st of the reporting year.
Tax on Economic Activity. This local tax is paid by all physical and legal persons engaged in any economic activity on the territory of a corresponding city (region).
This tax rate is set by local governments, but cannot exceed 1 percent of income (less material expenditures and VAT). For port services (loading and unloading ships) the maximum rate is 2 percent of income (less VAT).
Tax on the Transfer of Property. This tax is imposed on the transfer of real estate located in Georgia, inheritances and gifts, and the transfer of motor vehicles. The transferee is subject to the tax. Transfers of title, as well as certain leases of real estate are taxable.
The taxable amount is the amount of compensation transferred (but not less than the market price), including assumed indebtedness. In the case of a lease or tenancy, the taxable amount is determined by discounting the amount payable under the lease or tenancy agreement.
The tax rate on the transfer of real estate is 2 percent of the taxable amount. The tax is due prior to the registration of the documents transferring the property. If the property is not registered, the tax is due at the time the property is transferred.
For property received as inheritance, the tax is due no later than 6 months from the receipt of documents transferring title. For property received as gifts, the tax is due within 1 month of the transfer.
Tax on the Use of Natural Resources. Physical and legal persons engaged in any activity that requires a license for the use of natural resources (with the exception of land) owned by the state must pay this tax. The tax is imposed on the volume of natural resources extracted.
The tax rates vary by natural resource. For minerals, the rate is between 1 and 15 percent (of the price of the mineral resources extracted), timber 2–34 percent, water 3–10 percent, animals 2–55 percent.
The tax for the use of natural resources is due before the 15th of the month following the reporting month. However, the tax for timber and flora resources should be paid at the time of their transportation from the forest; the tax for water resources should be paid before December 1st of the relevant year; and the tax on hunting birds in migration should be paid on receipt of the license.
The tax on natural resources must be paid within 3 months after receiving the license for using the natural resources.
Exempt from this tax are the mineral resources gained in the course of underground construction. In addition, the tax rate is reduced by 70 percent for use of natural resources in connection with scientific and cultural activities and for users of natural resources that have carried out restoration or replacement of natural resources from their own funds, within the limits of the volume of restored resources.
Environmental Taxes. This tax must be paid by physical and legal persons engaged in any activity listed in categories 1–4 of the Law of Georgia on Environmental Permits (October 15, 1996), who pollute the environment from fixed sources or who import or produce gasoline, diesel fuel, kerosene, natural gas (except as used as a raw material for production of goods), or liquid gas.
Tax rates are based on the pollutant emitted, whether it is emitted into the atmosphere or water (either directly or through sewers and storm drains), and geographic region. For other items the tax is based on the amount imported or produced. Imported goods that are later exported are exempt from this tax.
Tax rates apply to pollutants emitted within limits set by environmental laws. Pollutants emitted in excess of established limits are subject to a fine equal to five times the tax rate for pollution within the limit (see the section on fines and penalties below).
Taxpayers who pollute the environment from fixed sources must submit a tax return certified by the Ministry of Environment and Natural Resource Protection to the tax agency and pay the tax by the 15th of the month following the reporting quarter. Taxpayers who produce or supply gasoline, diesel, kerosene, natural gas, or liquid gas must submit a tax return by the 15th day of the month following the reporting month.
Taxpayers who import any products subject to the pollution tax must pay the tax before the customs agency clears the products. Customs may clear the products only after the tax agency issues a receipt indicating that the tax has been paid.
Background. Georgia was one of the first CIS countries to codify its tax legislation in a comprehensive Code. However, since its adoption in 1997, there have been numerous amendments, which have considerably reduced the consistency of the Code. Some of the mayor changes in recent amendments include: i) changes in the tax rates for tobacco products and the tax rates of the motor vehicles ownership tax; ii) repealing provisions in the Code allowing the tax administration to seize and sell delinquent taxpayers’ property; iii) introduction of exemptions from property taxation for enterprises and physical persons in mountainous regions. The IMF carried out a review of tax policy in 2000 and a number of the recommendations from this review were actually included in a tax reform package prepared by the Ministry of Finance in September 2001. However, this package has not been presented to Parliament so far. Key issues remaining on the tax policy side are:
Unstable tax policy framework. The history of tax policy changes in Georgia since adoption of the tax code demonstrates a lack of long-term policy planning and a focus on short-term policy measures, disregarding the general consistency of the Code. Such approach has led to constant changes to Article 273 (on transitional provisions). Even fundamental policy changes are not introduced as permanent features of the tax system, but as temporary ones. A typical example is the cigarette taxation, which has been modified six times (!) since the Code entered into force. New taxation schemes are often introduced late in the year, for short periods of time and without clarification as to their duration. The current taxation scheme for tobacco products was introduced for the year 2001 only on December 2000 and was extended for another year through another amendment to the Code on December 2001. An even worse case is the excise tax on the importation of pyrolysis liquid products which was set at a rate of 400 GEL per ton on December 2000 and reduced to 50 GEL per ton less then four month later. There are numerous similar examples of short-term tax policy measures and frequent changes of tax legislation Such an approach neither allows the business community to calculate its tax burden over a longer period of time, nor does it permit the revenue authorities to design appropriate taxation strategies and develop a long-term planning of resource mobilization. The strong influence of lobbies in Parliament and the obvious tendency of parliamentarians to further narrow the tax base by granting sector and specific exemptions and rate reductions also contributes significantly to the low quality of tax policy making in Georgia.
VAT Threshold. Currently, VAT registration is mandatory for businesses with an annual taxable turnover of 24,000 GEL or more (and voluntary for a businesses below this threshold).[4] As a result of the low registration threshold, the tax administration has to deal with a large number of small businesses as VAT taxpayers who contribute little to total VAT revenues. For example, an increase of the threshold from 24,000 to 100,000 GEL would reduce the number of mandatory taxpayers from around 13,000 to 3,200. It would at the same time reduce the total VAT collection by around 23 percent. A reduction in the number of taxpayers could substantially facilitate the administration of the tax and help combat VAT evasion by permitting a more comprehensive cross-checking of VAT invoices and making it more difficult to establish shell companies for evasion purposes. [5]However, this result can only be achieved if the scope for voluntary registration is reduced. The Ministry of Finance therefore should consider to limit voluntary registration, e.g. by excluding businesses with a turnover below 50,000 GEL.
VAT Distortions. There is increasing frustration with the performance of VAT and the distortions its creates because the tax net is narrow and businesses are often unable to deduct VAT payments on their inputs. First, despite the low threshold, the number of 17, 000 businesses registered is quite low by international standards. Second, a true VAT, which is supposed to avoid tax cascading and economic distortions, requires a prompt and full refund of the part of the tax on inputs which exceeds the tax due on outputs. This is especially important for exporters. In Georgia the amount of unpaid VAT refunds is large (about 29 million GEL at the end of 2001). Tax inspectors should eliminate the practice of treating VAT as advanced payments against future tax liabilities in order to meet their monthly revenue targets (see section on tax administration below). Third, while many countries have introduced limited exemptions or reduced rates in their VAT laws to reduce regressive elements of the tax, the scope of tax privileges in the Georgian VAT continues to increase, and the country has embarked on the dangerous path to use tax privileges as a way to compensate for administrative or legal deficiencies.
Frustration with the distortion effects of the VAT has caused some policy makers to consider whether to replace the VAT with a sales tax. The objective would be to reduce compliance risks by applying the tax to one stage of the business cycle only. There are serious concerns regarding this idea. VAT despite its relatively low efficiency has become the main revenue source, contributing 45 percent to total gross tax revenues in 2001. Experience in other countries shows that sales taxes have a far lower revenue potential than the VAT, because it does not capture the total value added in the production and distribution phases and their rates normally are not higher than 5 percent--because of administrative difficulties. In addition, compliance risks and compliance management challenges would not be reduced because collection would have to rely on the retail sector which is more difficult to administer. Rather than replacing the VAT with a sales tax, the focus should be to improve VAT administration and actually implement the key principles of the tax, such as an effective refund system for exporters. A performance of the tax improves; consideration could then be given later to lowering the standard VAT rate.
Proposed simplified tax. To compensate for the revenue loss caused by increasing the VAT threshold, MoF plans to introduce a simplified tax for taxpayers who are not registered for VAT, and to modify the current presumptive tax for individual enterprises, which raises relatively little revenues (in 2000 actual presumptive tax collection was only 5 million GEL or 0.7 percent of total tax revenues), by changing it to a fixed tax with a broader tax base. The MoF proposal is to levy the simplified tax rate of 7 percent on gross income, which will require some basic accounting. The fixed tax will, similar to the current presumptive tax, be based on the nature of the business activity, the size of the business and the business location; it will include more types of small businesses than the presumptive tax. Although some (Foreign Investor Advisory Service (FIAS) December 2001 report[6]) consider a fixed tax to be extremely complicated, it need not be so. The fixed tax, if well designed, can be transparent and easy to administer tax. It offers no scope for negotiation to taxpayers, does not require detailed bookkeeping, and could reduce the opportunity for corruption and the compliance costs for taxpayers. There are some issues regarding this presumptive taxation scheme:
The combined fixed tax and simplified tax is supposed to compensate for the increase of the VAT threshold. However, estimated revenues from the fixed and the simplified tax are 27 million GEL, which is far less than the expected decrease in VAT revenues. While the increase of the VAT threshold and the introduction of the fixed tax are laudable reforms, the revenue impact of the reform will need to be studied further.
Parliament has rejected the proposed simplified tax because it considers the rate (7 percent) too high and the coverage too narrow. According to some parliamentarians, the scope of the tax should extend to some larger businesses, which clearly reflects the interest of certain business sectors to simplify and reduce taxation. Presumptive taxation based on gross figures should be limited to Small & Medium-Sized Enterprises (SMEs) with no sufficient bookkeeping, while all larger businesses are required to keep books and records and are taxed on a net basis. There is no good reason to extend the scope of the simplified tax to larger tax payers.
Excise Taxation. Due to its open borders and weak administrative capacity Georgia faces major problems collecting excise taxes. Reduction in excise tax rates has been the preferred method to improve compliance, but with no positive results so far. Despite this experience the trend to reduce excises continues, which is worrisome. Georgian excise taxes are actually very low by international standards already, and the focus should more be on efficiently enforcing the excise tax regime. Compared to the CIS country average, excise tax revenues in Georgia are low; in 2000 excises in Georgia contributed 1.5 percent to GDP, while the CIS average was 2.1 percent. Looking at neighbouring countries, excise revenue performance is much higher in Armenia with 2.5 percent of GDP and somewhat higher in Russia with 1.9 percent of GDP; it is much lower, however, in Azerbaijan with only 0.5 percent of GDP (which is together with Tajikistan the lowest figure in the CIS region). The fact that Georgia has managed to accumulate a surprisingly high level of tax arrears in an area where arrears normally should not build up – according to IMF data the amount of tax arrears on excises was equivalent to 2.7 percent of GDP by beginning of 2000 – shows, however, that excise revenue increases will also depend on the ability and support of the tax administration to collect revenues from major businesses in the oil and cigarette industry.