The Georgian Taxation System - an Overview
Taxation – fundamental to state formation and the provision of state services – has long been an issue that has plagued Georgia. Before the Rose Revolution, there was widespread tax avoidance and evasion, reflecting state weakness and corruption, and impacting severely on service delivery.
With political will, and specifically with the introduction of a new tax code in 2005, there has, however, been a major change in the Georgian fiscal landscape. Taxes have been slashed, procedures streamlined, corruption eliminated and compliance greatly improved. Reflecting this has been a massive increase in the government’s tax-take.
There are, however, some major caveats. The tax administration, while improved, is still less than efficient, and crucially has failed to apply risk analysis or other auditing mechanisms in selecting businesses for tax audits. As well as a waste of administrative resources, this fundamental omission has also allowed for the re-emergence of some disturbing practices. The excesses of the Financial Police, all too evident in the first few years of the Saakashvili administration, are again a fact of life for many businesses in Georgia. Budgetary shortfalls are a major motivating factor, but so too are political considerations, with tax audits, as one commentator noted, being used as a political club.
While the authorities have recognised that low taxes contribute to economic growth, they have failed to apply fiscal instruments to various policy areas. Reflecting an extreme liberal economic outlook, taxation has not been used as a lever to promote job creation in specific sectors or regions. Neither has it, like it is in other countries, been used to advance a whole array of public issues, such as poverty alleviation, urban renewal or decentralisation.
Ultimately, taxation is a mirror of any given country, and as such, the major advances and continued weaknesses in the Georgian tax system reflect both the concrete progress the country has made over the past six years, and the continued need for more reform.
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Endorsement by AMCHAM
David Lee, the President of the American Chamber of Commerce in Georgia, who is also the General Director of Magti, the largest cell phone provider in Georgia, endorsed the report at a public presentation at TI Georgia's office on 9 June:
"We [the American Chamber of Commerce in Georgia] fully endorse everything in this report", Lee said. "Taxation may become one of the biggest barriers to attracting FDI. If taxation is not fixed, it becomes a problem as big as corruption."