Four months ago, Georgian President Mikheil Saakashvili announced a new tax initiative. While the government has boasted it will significantly lower the tax burden for businesses, tax experts and opposition politicians are questioning who will truly benefit from the changes.

The new tax amendment basically consists of abolishing the social tax (currently 20 percent of a worker’s salary), reducing the profit tax by five percent but doubling the income tax (from 12 percent to 25 percent).

Although the president announced the changes during his state of the union address to the parliament in March, four months later the draft law has still not been considered by parliament. However, the changes have already been written into the budget for the next three years, including calculations for how much the tax cut will cost the government: 134 million Lari in 2008 due to the five percent cut in profit tax and 20 million Lari from the abolished social tax.

Alex Aleksishvili, the finance minister, told business people during a recent speech in Tbilisi that the idea of the tax is to encourage more businesses and more investments – thus making up for the initial blow to the budget with more overall tax payers. Tax experts, however, have questioned exactly how much the new breakdown will help businesses.

By doing the math, the total savings to a business owner appears to be less than two percent – not exactly the tax break that dreams are made of. Especially considering the fact that Georgia already boasts of one of the most liberal tax codes in the region; since the Rose Revolution the number of taxes has fallen from over 20 to less than ten.

In addition, it is not clear who will really benefit from the new amendment. While business owners and employers will pay about 1.6 percent less in taxes than they were previously, their employees might have to pay considerably more. Adding to the confusion is the fact that in Georgia, many private sector employees negotiate based on the net take home pay – not the gross salary – so the tax burden will actually fall back on the employers themselves. And those workers who negotiated based on the gross salary, which allegedly includes most government sector employees, will be hit with the 25 percent income tax.

Another gray area concerns those taxpayers who are currently exempt from paying the social tax – a large and varied group that includes everyone from landlords to some foreigners. Non-Governmental Organizations could also be hard hit if their main source of income, namely grants, is subjected to the new law.

According to the current draft law prepared by the ministry of finance, taxpayers who were except from the social tax will not be subject to the new tax (which should come into force in January 2008) until January 2011. However it is not clearly spelled out in the draft code exactly who those tax payers are or what will occur in three years.

During a fundraising dinner with business people in May, President Saakashvili agreed that while his idea is to support businesses, employees should not be responsible for the total burden.

“I want us to thoroughly examine this [proposal]. The combined tax is aimed at making your life easer, but at the same time this new tax should not make your employees’ lives more difficult. So we should thoroughly study it in order to avoid any gaffes.”

Common wisdom holds that any tax break is good news for business. However this initiative – as it is currently being promoted by the government – offers little to businesses and could potentially create financial havoc for employees.

Despite the fact that Georgia has one of the most liberal tax codes in the region, it does not offer large investors any real incentives to invest in the country in terms of tax breaks. If the government is interested in promoting investment, looking into creating tax breaks or lowering the country’s VAT could have a bigger, more positive impact than the 1.6 percent initiative that is being considered now.