Business Wants Government to Ensure “Predictable” Environment

Q&A with Executive Secretary of the Georgian Federation of Business Giorgi Isakadze

While discussing Georgia’s economic achievements in 2004, the country’s government boasts a new tax code, law on financial and tax amnesty, a flourishing privatization process and increased budgetary expenditures. Finance Minister Zurab Nogaideli, who is set to become Georgia’s new Prime Minister, has also vowed that the new cabinet will remain committed to the policies carried out by late Prime Minister Zurab Zhvania.

Civil Georgia interviewed Giorgi Isakadze, the Executive Secretary of the Georgian Federation of Businessmen, over this new tax code and the recent economic trends developing in Georgia. The Georgian Federation of Businessmen, which was established last December and replaced the previous Taxpayers Union, is gradually becoming a strong business lobbying group.

Giorgi Isakadze says that “the government’s long-term strategic vision is of crucial importance for business. Business needs a predictable environment and transparent rules for the game.”

Q.: More than a month has already passed since the introduction of the new tax code. Can you assess how it is working in practice?
 
A.: The government’s claims that the new tax code is the most liberal in the post-Soviet space are not true. But I should say that it has been significantly improved in comparison to the previous one. The new tax code is much batter for taxpayers.
 
It contains a great deal of positive moments, such as the simplification of various procedures for taxpayers, including bill of sale forms, invoices, etc.   
 
The fact of reduced taxes, especially the income [from 20% to 12%] and social [from 33% to 20%] taxes, is rather important. It is good that the government has agreed on the most optimal variant of a VAT refund. 
 
But the government has made a huge mistake in enforcing this code shortly after it was approved by the Parliament [late last December]. I mean, initially, it should have been ready by November 5 [2004], but it was approved only in December and began being enforced on January 5 [2005]. But the code needed adaptation period, prior to enforcement.
 
Hence, it hardly worked – and I will tell you why: the code, which introduces new rules for the game, created problems both for a taxpayer and for an inspector. Neither an inspector nor a taxpayer understood how to pay the sum – that triggered particular uncertainty and confusion.
 
On the other hand, the tax code is not just the document adopted by the Parliament. It incorporates numerous bylaws, most of which were written in January. I mean the rules on how to fill in VAT invoices, filling in declarations and their delivery, registration procedures, etc. These are absolutely new procedures.
 
In some cases the new tax code envisages stipulations which submit the state and the businessmen to unequal conditions. While the state demands an entrepreneur to meet particular obligations within 15 days, the state itself has a six-month term to meet the same obligations.

Moreover, the tax code includes separate articles which allow for double interpretation.

The Federation of Businessmen has begun working over a new project, named Commentaries regarding the Tax Code. I would like many people to join us in elaborating this book, which will be more voluminous than the code itself. In order to avoid double interpretation of the law, each article will be explained in [this book].  The authorities should join the process as well, in order enhance the legitimacy of these explanations.              
 
Moreover, these commentaries will help the reduce number of tax disputes, since the sides will easily understand the contents of the documents and will no longer have to take legal action.     
 
After the six months, I think, more features of the new tax code will be demonstrated. In the event that some negative sides of the code are exposed after six months, the government should prepare a package of changes and improve the code.

I want everybody to understand that we do not urge for a reduction of taxes. We demand a simplification of the process of dealing with the government when paying taxes.

Q.: What impact does the increase of excise taxes have?
 
A.: The authors of the new tax code considered that taxation of excise goods [oil products, tobacco, etc.] is one source of revenue, thus increased the taxes on these goods. In turn, this triggered a raise in prices of other products as well. Thus, nobody should think that prices on the consumer market increased because the authorities curbed contraband. It is largely because of an increase of excise taxes. I still think that the code alone laid the foundation for this raise in prices.
 
Q.: The authorities have postponed the reduction of VAT from 20% to 18% for 6 months, until July, 2005. Do you think the government will keep its promise and reduce the VAT?
 
A.: No, I do think so. I was astonished at the government’s intention to reduce VAT from 20% to 18%, since over the past 5-6 years 60-65% of the budget was built on VAT revenues. During consultations over the code, we [businessmen] were rather grateful for this [2%] reduction. At the same time, we tried to explain to the government that this was not an issue which we were insisting on.
 
Q.: Does the new tax code foster investments?
 
A.: It is important to note that the code includes a very liberal provision regarding investment returns. If an investment is made, VAT and amortization expenses are refunded within a month. This is a very serious privilege for investors.
 
However, this is not enough to attract investment. There are much stronger factors, such as political stability and criminal activity, [that affect investment]. The authorities should take care and create a favorable and predictable business environment.
 
Q.: Last year we often heard the term “frightened business.” Was business really “frightened?”
 
A.: Yes, I van confirm this. It was really this way.  Certainly, as a result of objective or subjective reasons, some businessmen made mistakes in the past; however, it is impossible to conduct business under persisting intimidation from the government.
 
The authorities should understand that the private sector is the only guarantor of their political promises. The government has not created new jobs for a long time, while the private sector has. Simply, it [business] needs elementary support and a predictable environment.
 
In his annual address to the Parliament President Saakashvili spoke rather objectively regarding business. He said that last year [the government] insufficiently worked with business circles.
 
The government’s long-term strategic vision is very important for business. Business needs a predictable environment and transparent rules for the game.
 
Q.: Are businessmen satisfied with the tax and financial amnesty declared by the authorities?
 
A.: They are not satisfied with many aspects of this law. In some cases many businessmen were given unequal conditions, since a particular selection took place regarding whom it will and will not apply to.
 
Another problem is that the law is difficult, from the readability point of view. Recently representatives of the Parliament and the Government met each other. During their talks they found, in a three-page law on financial and tax amnesty, 18 issues which were rather difficult to be understood unambiguously. However, a certain way out was found: since the law on amnesty is a single act and cannot be amended, the Parliament will explain these articles anew, under a special decree.
 
The government told businessmen to destroy all the papers regarding tax accounting before 2004 [the law envisages amnesty for those persons who evaded paying taxes before January 1, 2004], while I recommend that they keep these documents.
 
Despite such long work over the amnesty issue [almost 6 months], particular questions still exist. We have received an intermediate product, which raises doubts among the business circles, who claim that it was good PR [by the government] and not a good job.
 
I think that the ratio of satisfaction and dissatisfaction among businessmen about this amnesty is 50/50.
 
Q.: How liberal do you think new Prime Minister Zurab Nogaideli will be towards businessmen?
 
A.: Many businessmen have met the idea of Nogaideli’s nomination as the Prime Minister with concern. But, I welcome Nogaideli’s candidacy, since he is a professional manager.
 
If he launches active consultations with entrepreneurs and business groups, he will receive a great deal of recommendations, which will help him.     
 
I think Nogaideli, now as a major political figure, will support a policy of economic deregulation. One positive contribution made by [Kakha] Bendukidze [State Minister for Economic Reforms] to this government is that he is trying to free entrepreneurship from state interference as much as possible. In my opinion, deregulation should take place and everything which does not fall under the category of ‘strategic’ should be sold.       
 
It is also very important that the government should be transparent, in the privatization process, for example, in order to disavow society’s doubts regarding various privatization deals. The government should not give reasons to doubt this process. I pin my hopes on Nogaideli’s principled character in this regard.