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Small Entrepreneurs to Enjoy Tax Preferences

Companies with about 500 000 GEL Turnover will Pay 1% Turnover Tax, instead of 5%.

Government of Georgia has decided to alleviate taxation regime for small entrepreneurs: the turnover tax will be lowered 5 times. The current 5% tax will be reduced to 1%. Moreover, criterion for determining the size of an enterprise will also change. Today, small entrepreneurs are companies with turnover of about 100 000 GEL. After introduction of the preferential regime, the top margin of turnover tax for small enterprises will rise to 500 000 GEL.

Besides reduction in turnover tax for small business, Government of Georgia has announced other changes too. New tax initiatives will refer to about 120 000 small entrepreneurs. Objective of the initiative is to promote a development of small and medium entrepreneurship in Georgia so as the ratio of small and medium businesses grow in total economy, Minister of Finance Mamuka Bakhtadze noted. Moreover, Government also plans to abolish an obligation for additional bookkeeping and advance payments. One of the initiatives calls for exempting airplanes maintenance services from VAT on the territory of Georgia. Government of Georgia plans to promote re-exports of vehicles. Moreover, deadline for implementing profits tax reformation will be extended to January 1, 2023.

Government of Georgia announced a development of small and medium business sectors as a priority direction in 2016, when it approved a four-year strategy for development of small and medium entrepreneurship. Objectives of this strategy: 1) Annual output of small and medium business companies shall increase by averaged 10% by 2020; 2) Number of employees at small and medium business sectors shall increase by annual 15%; 3) Productive capacity shall increase by 7% as of 2020;

According to Geostat, national statistics service of Georgia, in 2016 the ratio of small and medium enterprises in total turnover was 9%-9%. The situation did not change essentially in January-September 2017, while the international practice shows that small and medium business is a locomotive of economy in the developed countries. Government of Georgia hopes that lower tax burden will radically change the current situation.

‘We believe that this reform will essentially alleviate the condition of small entrepreneurs. Tax burden will be essentially lowered and new entrepreneurs will be incentivized”, Prime Minister Giorgi Kvirikashvili noted at the February 15 government meeting.

Economists positively appraise the new initiatives. Alleviation of tax burden for small entrepreneurs has deserved particular approval. At the same time, we should know that only tax preferences cannot develop the small business sector.

“Economic success of any country is driven by small and medium business sectors. Small and medium enterprises shape more than 50% of the economy in the USA, which is a homeland of the world’s giant companies. I have no intention to diminish Government’s initiatives, but more fundamental changes are required for development of small and medium business sectors”, economist Vazha Beridze said.

Access to financial resources and qualified workforce are fundamental problems and our economy cannot be developed without tackling the mentioned problems, Vazha Beridze noted.

“Restricted access to finances and unqualified workforce are fundamental problems and we should not dream of economic development without resolution of these challenges…In Georgia there are no other structures for redistribution of financial resources, except for commercial banks. We have the sharpest problems in his direction, but our efforts for improving the situation are not sufficient. In general, I think our appraisals are exaggerated in relation to tax issues.

Only low taxes and simple code cannot ensure economic success. Those, who think so, diminish economics, as a science. Taxes are important only in combination of other components. Trust me if we remove all taxes without making financial resources accessible and enhancing education, economic situation will not change essentially. If a person lacks for business doing skills and has no access to financial resources, tax preferences cannot alleviate his condition”, Beridze said.

Economist Soso Archvadze also appreciates tax preferences for small entrepreneurs. The Government’s initiative will boost entrepreneurship activities and in the course of time, this decision will enlarge the added value and create new job places. As a result, the state budget will mobilize more revenues. At the same time, it would be better to differentiate taxes due to fields and set preferences to manufacturers of agriculture products, Soso Archvadze said.

The recently appointed Business Ombudsman of Georgia also makes emphasis on the development of small entrepreneurship.

“I think special regard should be paid to small business companies, because many business bodies operate in this sector. Naturally, all problems and issues are accumulated in this sector, which may be readdressed to various state offices”, Irakli Lekvinadze said.

A major part of economists hail tax burden alleviation for small business sector. At the same time, another aspect is whether these changes suffice to make small and medium business companies successful. If we name all problems that small and medium entrepreneurs have been facing for many years, tax burden will not be mentioned in top three challenges. The sharpest problem is related to a restricted access to financial resources, as well as invaluable economic education and limited competitive environment.

If government of Georgia does not pay due attention to resolving the mentioned challenges, only tax cuts cannot improve the current situation and we will have to live in the economy of major businesses for many other years. As a result, inequality will increase and economic benefits will be distributed unequally.