Phenomenon of Tax Evasion
Tax evasion is the general term for the attempts by individuals, firms and other entities to evade the payment of taxes by illegal means. Tax evasion usually entails taxpayers deliberately understating the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting.
Contrary to tax avoidance - the legal utilization of the tax regime to one’s own advantage in order to reduce the amount of tax that is payable by means that are within the law, tax evasion implies direct violation of civil, administrative, criminal or tax legislation by the taxpayer through committing a crime. The taxpayer’s action is illegal and unlawful, manifesting itself in the taxpayer’s deliberate action, which is directed at providing him/her with the opportunity to completely evade, or partially avoid the responsibility of paying taxes. Actions of individuals or enterprises directed towards decreasing taxes or completely hiding them are subject to different forms of legal prosecution.
Andrei Yakovlev (1999) argues that tax evasion schemes in transitional economies differ from traditional Western-style evasion schemes in two ways. First, they concern mainly firms, not individuals. Second, these schemes are almost risk-free for a legally operating firm. The scale of tax evasion exceeds the levels in developed countries. It seems clear that virtually all enterprises in these countries have incentive to use evasion scheme at some time.
There are several psychological, social and even political reasons why individuals and firms engage themselves in tax evasion. In Georgia three main drivers of tax evasion are lack of trust to the government, unfairness of tax system /excessive tax rates and weakness of tax administration. Read more
Problems of Taxation
Tax evasion is an illegal practice of avoiding taxes that to some extent characterizes the taxpayers of all countries, despite their historical, social or economic differences. The degree of evasion is considerably high at countries in transition. The governments of these countries have been carrying out simultaneous reforms of legal and economic institutions to eliminate this phenomenon; however it still remains as a factor hampering economy. Problem of tax evasion is discussed in original papers of Andrei Yakovlev (1999), Jukka Pirttilä (1999) and Jorge Martinez-Vazquez and Robert Mcnab (1997).
The problem is particularly important for the Georgian business environment, strongly influenced by so called “socialist entrepreneurial mentality” and low level of tax payment culture. Opportunity of cheating arises from the inability of tax authorities preventing such action. As a consequence, the absolute majority of entrepreneurs are involved in tax evasion practices yielding alarming scales of shadow economy. Since tax evasion places large externality on other economic agents, such practices result in large scale epidemics of hiding taxes, eventually resulting in huge loses for the state budget and reduction in government spending.
Opportunities of evading taxes for individuals in Georgia arise from the inability of tax authorities to prevent such action. Tax department fails to avoid appearance and later timely detection of already appeared sham firms that are powerful tool for large scale tax cheating for large as well as for small and medium enterprises. In addition, tax officials are unable to eliminate flow of illegal remuneration from employers to employees. Such payroll is simply unreported in company’s official records and therefore is no tax deductible. Read more
Georgian Economists on Improvement of Tax Code
Back in early 2001, the Georgian government requested that a study be made of barriers to foreign investment in the country. The World Bank took up the bait and with financing from the Netherlands, asked FIAS to examine the administrative barriers to investment in Georgia. This service has a fair degree of experience in researching developing countries to see how well (or badly) they are doing in terms of investment, and advising on how to improve administrative and other machinery to attract more foreign capital. By February 2002, they had completed their report and presented it to the leading government economic policy makers in the country and a few leading lights from the local business community.
The FIAS report continues its rather damning analysis of the tax system in Georgia with the following: ‘The system of taxation administration in Georgia is so problematic that it is commonly cited as one of the biggest constraints to business operations and new investment. Presented with a very difficult business environment, foreign enterprises are going elsewhere. The private sector is growing, although much of this growth comes from already established businesses. Entry of new enterprises is very low, indicating that while existing investors have managed to cope in the difficult environment, potential investors are probably deterred from investing in Georgia. Certainly the flawed taxation administration system is a key contributor to this poor environment, and thus its reform should be a priority for the government. Read more
Problems of Tax System
After initial success in economic development in 1996-1997, Georgia now faces a deep fiscal crisis. One of the most critical economic challenges going in Georgia is in the sphere of tax collection. Georgia’s record in tax collection as percentage of GDP is one of the lowest in the NIS and the volume of budgetary arrears already at around 200 mln Lari (100 mln USD) continues to raise. Such a collapse cannot be fully blamed on the impact of world economic crisis. There are some structural problems that need to be addressed. One of them is the lack of integration and coordination among governmental institutions. Georgian legislation assumes concerted work of Ministries of Finance, Economy, Revenue, Department of Statistics and the National Bank, who are required to work together on various stages of the budget process. Lack of coordination among these institutions can lead to low quality of financial management in the country. Both the Government of Georgia and the international donor community realize the importance of institutional building as one of the avenues for development.
The inability to collect revenues due to inadequate tax implementation and trade regulation is still at the heart of Georgian economic difficulties. While the estimated share of the “shadow economy” has dropped from almost 80 percent to nearly 30 percent, it still accounts for a significant portion of the nation’s trade. Many imported products that are difficult to monitor, such as wheat, continue to cross the border illegally, further undermining the domestic agricultural sector. This will continue until Georgia tightens its border controls, especially between Russia and South Ossetia. Read more
