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Small Business Preferences and Available Risks

New tax preferences for small business sector will come into force on July 1. The government’s initiative calls for cutting the turnover tax for small business  5 times. As a result, companies with 500 000 GEL turnover will move to the category of small business.

This initiative announced by Prime Minister Giorgi Kvirikashvili encourages that  preferential taxation regime will considerably enliven the business sector performance.

Government of Georgia, namely, Ministry of Finance has developed the package of these reforms, Minister of Finance Mamuka Bakhtadze said.

“This initiative is a unique decision in the world practice and International Monetary Fund (IMF) fully backs it. New preferential tax regime will refer to almost 100% of physical entrepreneurs, that is 120 000 entities and people behind them. Our priority is to enable Georgian entrepreneurs to spend less time on communication with taxation offices  so as they make focus on their business”, Minister of Finance Mamuka Bakhtadze noted.

These initiatives introduce several preferences: 1. all businesses with about 500 000 GEL revenues will receive the status of a small entrepreneur (today this top margin make sup 100 000 GEL); 2. the 5% tax on entrepreneurs will be lowered to 1%; 3. the current practice enables to pay taxes in advance. This practice will be removed and small entrepreneurs will pay 1% turnover tax at the end of a month; 4. small entrepreneurs wishing to be registered as VAT payers will be able to count VAT in standard regime or get back the surplus amount from the central budget within 5-7 days.

Business Ombudsman Irakli Lekvinadze hails this initiative. These legal amendments will set important preferences to entrepreneurs, he said.

“The initiative will come into force in July. I believe these amendments will bring important preferences for entrepreneurs, physical bodies, who have manly engaged in trading. Technical part is also important  – if they had to carry out difficult process of bookkeeping, now they will be able to enjoy 1% taxation regime and only fill out declarations. These changes do not refer to VAT. Companies with more than 100 000 GEL turnover will pay VAT anyway. Preferences will be applied to the part of revenue or turnover tax”, Lekvinadze noted.

Economic experts have also approved the mentioned initiatives. Expert Levan Kalandadze hails the initiative, but suggests the Government to lift the VAT top margin for higher effectiveness.

“I suppose that VAT top margin will be 100 000 GEL again. This signifies small entrepreneurs with more than 100 000 GEL will pay VAT anyway. To make this model more perfect and efficient, the Authorities should not only expand the circle of companies with the small business status, but also to raise VAT top margin to 500 000 GEL. As a result, small entrepreneurs with about 500 000 GEL turnover will enjoy the same preferences as enterprises with about 100 000 GEL turnover”, Levan Kalandadze said.

Thew new wave of reforms and their content announced by the Prime Minister and the Finance Minister is impressive, Beka Odisharia, deputy head of Georgian Dream parliamentary faction commented regarding the Prime Minister’s initiatives.

The mentioned initiatives will refer to ten thousands of citizens of Georgia, who create wealth, employ other citizens and ensure worthy life for their families, Beka Odisharia said.

“Formation, promotion and expansion of middle class  remains a key social-economic challenge for our country.. The mentioned reform is to bolster this important direction. I believe that each entrepreneur, who will enjoy these preferences, will create additional job places,”, Beka Odisharia said.

AYFB vice president Paata Bairakhtari also hails the initiative, but he also outlines risks that may arise.

“Small and medium business is a backbone of state economy in developed countries. But we have opposite situation – small and medium business in the gravest situation. For example, medium business employs 4 times less people, than the major business. Last year we introduced Estonian Model of profit tax and, in practice, only major business has gained benefits from it, because today small business is not able to make reinvestments. Deficit arisen after introduction of the mentioned model was covered by small business and ordinary citizens. Unlike Estonian model, the mentioned initiative is directed to development of small business, because the small business will be able to save financial resources, on the one hand, and protect itself from bureaucratic barriers, on the other hand. However, the mentioned tax preferences also comprise certain risks. For example, nobody talks  about how the budget deficit will be balanced after enactment of the mentioned law. Nobody says whether this deficit will  be balanced by ordinary citizens, as this happened in case of Estonian Model. These issues comprise serious risks and require valuable calculation and analysis. Otherwise, serious threats may arise in the country”, Bairakhtari noted.

Small business representatives also appraise the mentioned changes and ask the Government to ensure an access to financial resources after enforcement of new tax preferences.

Paata Abramia, founder of Greenpack packing materials manufacturing company explains that the mentioned preference will seriously stimulate small business development.

“Business will have all preconditions to work valuably and it will not face temptation to either hide incomes or show less revenues”, Abramia noted.

If the government expands an access to financial resources, this will further stimulate the business. Businesses, which had 100 000 GEL turnover and now they will be able to increase turnover to 500 000 GEL, they need corresponding financial resources, Abramia said.

«If the Government takes consecutive steps in this direction, we will genuinely welcome these efforts», Abramia said.

Vazha Natroshvili, head of Verdzi meat products manufacturing company, located in Dedoplistskaro, says that this preference will be applied to both individual entrepreneurs and LLCs and it will bring only positive effects.

“Company with 100 000 GEL turnover used to pay 5% to the state budget, that is 20 000 GEL. Under the new regulations, this amount has shrunk 5 times to 1%, that is 4 000 GEL. The saved amount will be directed to the company development, salaries will increase. This is wonderful decision”, Natroshvili noted.

The new initiative will increase quantity of small business companies, he added.

It will be excellent if the Authorities help small and medium business in improving the legislation. Today many organizations assume obligations, then fail to fulfill these obligations and go bankrupt. However, similar organizations bear no responsibility and this is not a good practice, Natroshvili noted.

«This factor damages our companies most of all. Small companies distribute products to stores and they do not pay the price in advance. And this store may go bankrupt and the company bears losses», Natroshvili said.