On 1 October 2013, economic debates were held in the Parliament of Georgia during which Pavle Kublashvili, Member of the Parliamentary Minority, declared: “I will try to explain why the economy is frozen. The reason for the economy being stagnant is the decisions made by this Parliamentary Majority and the government. The first thing they did upon coming into power is that they refused to reduce taxes. They revoked the decision, which had already been incorporated into the Tax Code, envisaging a reduction of income tax down to 18 and, later, to 15%. This is what caused the first sense of confusion in the investors... The mechanism you proposed to the public in the form of tax-exempt income, as a substitute, remained utterly unclear. Walk out into the street and ask anyone and see who of them has sensed any benefit from your decision.”FactCheck
inquired about the accuracy of the statement.
Up until 20 December 2012 a transitional regulation of the Tax Code of Georgia was in force which defined the physical income tax to amount to 20% until 1 January 2013 while from 1 January 2013 to January of 2014, the tax was set to be at 18%. Starting from 1 January 2014 the income tax would be reduced to 15%.
On 20 December 2012, an amendment was introduced into the Tax Code which abolished the transitional regulation and defined the income tax to stay at 20%. In place of the old regulation, which envisaged a gradual shrinking of tax rates, a new norm was introduced which brought in the term ‘tax-exempt income’ as an alternative to the tax rates reduction. The idea behind the tax-exempt income is the following: those employed physical entities, whose salary does not exceed GEL 500 (maximum yearly income of GEL 6,000), pay a regular 20% income tax throughout the year but then present a declaration to the revenues office at the end of the year stating that their yearly income did not exceed GEL 6,000 (GEL 500 a month) and receive a reimbursement on a part of their paid taxes based on this request. After the submission of the declaration, 20% of the tax-exempt income paid in income tax (20% of GEL 150 a month [subsistence level], that is, GEL 1,800 a year [150 × 12 = 1,800]; i.e., GEL 360) is returned to the taxpayer.
Introducing the abovementioned amendments, Nodar Khaduri, Minister of Finance, explained: “If one’s salary amounts to GEL 500, then he gets a net monthly salary of GEL 400 with 20% of the GEL 500 transferred to the state budget as an income tax. At the end of the year, the budget will reimburse GEL 360, in the role of a so-called thirteenth month salary. A teacher, for instance, whose salary is equal to GEL 300, will receive an additional GEL 360 at the end of the year but this will not concern high income individuals.”As reported by GeoStat, 662,600 employees were registered in Georgia in 2012 with an average nominal salary of GEL 712.
In his interview with Rezonansi, expert Soso Archvadze notes that presently in Georgia 300-350 thousand people have a salary lower than GEL 500. According to the government, roughly 2/3 of the employees (441,773) will benefit from the tax-exempt income while the rest will be taxed the usual 20%.
The previous government was indeed planning a gradual reduction of income tax and this plan was manifested in the Tax Code in the form of a transitional regulation, as well. After the Code was amended at the end of 2012, the tax reduction plan was revoked and the regulations on tax-exempt income were introduced instead. It is to be noted that in the case of the 15% reduction of tax rates, citizens would have paid 5% less whereas the tax-exempt income gives only a 4% relief. Furthermore, while the planned tax reduction would affect all employed individuals (including the self-employed), counting the 662,600 employees registered by GeoStat in 2012, the tax-exempt income will benefit about 450,000 employees according to the estimation of the government based on the data of 2012.
Based on the facts analysed in the article we can assert that the first part of Pavle Kublashvili’s statement is completely accurate while the other part of the statement, claiming the tax-exempt income to be entirely unclear and unproductive, proves to be incorrect. Tax-exempt income introduces certain benefits which have been discussed above. As for the matter of whether or not citizens should have felt the benefits granted by the regulation on tax-exempt income, these benefits will be realised starting from 1 April 2014 when the reimbursements of tax-exempt income will be paid to qualifying taxpayers following the submissions of their declarations.
Nevertheless, Pavle Kublashvili’s statement, claiming that the tax rates were going to be reduced, if it were not for the relevant decision being revoked by the new government, and its pathos relating that the planned tax reduction would have affected more employees and unlike the tax-exempt income would have had an immediate effect, are undoubtedly truthful.Consequently, we conclude that Pavle Kublashvili’s statement, “I will try to explain why the economy is frozen. The reason for the economy being stagnant is the decisions made by this Parliamentary Majority and the government. The first thing they did upon coming into power is that they refused to reduce taxes. They revoked the decision, which had already been incorporated into the Tax Code, envisaging a reduction of income tax down to 18 and, later, to 15%. This is what caused the first sense of confusion in the investors... The mechanism you proposed to the public in the form of tax-exempt income, as a substitute, remained utterly unclear. Walk out into the street and ask anyone and see who of them has sensed any benefit from your decision,” is MOSTLY TRUE.