10.36172/EKONOMISTI.2023.XIX.04.EKATERINE.SHAINIDZE

Expanded Summary 

In order to fulfill the obligations undertaken within the framework of the association agreement, a number of tax reforms were implemented in our country, the purpose of which is tax liberalization and promotion of entrepreneurship development.  However, it is interesting whether the introduced mechanism works effectively and whether it is correctly perceived by the tax payer. Within the framework of the research, we studied the behavior of taxpayers in relation to several tax regulations, the purpose of which was tax evasion.

As is known, with the introduction of the new tax code in 2011, special regimes of income tax taxation were defined, including the status of small business, within the framework of which the annual turnover allowed for payers with the mentioned status was defined as 100,000 GEL, and the tax rate was 5% or 3%. As of July 1, 2018, the annual threshold allowed for persons with small business status was increased to 500,000 GEL, therefore, they were allowed to register as VAT payers, and the tax rate was reduced and set at 1% or 3%.

Based on the existing regulations, an entrepreneur individual can use the small business status for a wide range of trade and service provision.

The payer can procure the performance of various works necessary for its activities by hiring personnel or purchasing services. For example, cargo transportation can be carried out both by hiring a carrier individual (as an employee) and by purchasing services from an entrepreneurial individual. If in this particular case the shipment of cargo was carried out by a hired individual, the salary paid to him will be taxed at the rate of 20% of income tax, and if the purchase is made as a service from an entrepreneur individual with the status of a small business, the remuneration will not be taxed at source and the provider of the service will be liable to pay income tax. in the amount of 1% or 3% of the total income.

As we can see, the difference in terms of taxation in this case is significantly larger (17% or 19%). Thus, a certain category of taxpayers, in order to alleviate the tax burden (which is expressed in the amount of withholding tax on wages) replaced the hiring of personnel with the purchase of services from persons with small business status.

In contrast to the given situation, the Revenue Service developed a methodical guide "On the change of the qualification of the economic operation", by means of which, during the checks carried out with a significant part of the payers, the qualification of providing services was changed to work for hire and they were imposed appropriate sanctions for not withholding tax at the source.

The revenue service also had to use similar locking mechanisms by introducing the status of qualified and non-qualified VAT payers and checking the personal bank accounts of staff employed in the restaurant business.

Thus, the peculiarities of the behavior of the taxpayers studied by us in the framework of some tax regulations indicate the fact that the tax reforms implemented in the direction of tax liberalization do not achieve the appropriate results. The following are the main reasons for this important problem:

- Tax culture of taxpayers is low and they constantly try to find any way to avoid taxes;

- taxpayers are helped to artificially reduce their tax liabilities by tax norms that are sometimes seemingly unambiguous, but still ambiguous, as the statistics of tax disputes show, as a significant part of them are partially satisfied;

- The reforms are inconsistent and the expected behavior of the payers is not taken into account, which is why the controller has to devise and implement locking mechanisms later;

- Cases of abuse of mitigating norms and expected consequences are not described in detail in the legislation.

Therefore, in any legislative change, it is necessary to understand from the beginning all possible options of its use for tax evasion and to introduce practices to minimize such actions. In parallel with the introduction of preferential regimes, tax administration should be tightened in order to prevent attempts to abuse them on purpose. The consistent and timely use of the aforementioned levers will have a positive impact on both the reduction of the shadow economy and the raising of the level of tax culture.