On 31 October, during the plenary session of the Parliament of Georgia, member of the Parliamentary Majority, Davit Berdzenishvili, stated: “The Ministry of Finance failed to meet the requirements of the law and did not divide the income tax between the centre and the local self-government.”FactCheck
took interest in Mr Berdzenishvili’s statement and decided to verify it.
The Local Self-Government Code came into force on 15 June 2014 and it made important changes in the sphere of local self-government.
Before reviewing how income tax is allocated, it is important to know from where municipalities receive funding. The municipalities (self-governing cities and self-governing communities) are independent in planning and allocating their own budget (Article 90). The budget of a municipality consists of internal and external receipts. external receipts include funds received as aid from the state budget and/or the autonomous republic budget:
- Cohesion transfer – funds allocated from the state budget to the local self-governmental entity budget according to a fixed formula, aiming to let the self-governing entity exercise its authority;
- Capital transfer – for the implementation of a target capital project;
- Special transfer – for the liquidation of the damage done by a natural disaster, ecological or any other catastrophe, hostility, epidemic or any other emergency situation;
- Target transfer – funds received for the exercise of delegated authorities;
- Received grant.
defining the sources and percentage of the funds that are transferred to the local self-government budget is attached to the appendix of the Budget Code of Georgia.
As of today, no funds are left in the local self-government budget from income tax as all funds are being mobilised in the state budget. The incomes received by the state budget from income tax are shown below:
As can be seen, income tax holds an important place in the state budget.
The transitional statutes of the Local Self-Government Code (as of 30 July 2014) state that the Ministry of Finance of Georgia had to present a bill on Amending the Budget Code of Georgia before 1 September 2014. One of the goals of the bill would have been to define the proportions and mechanisms for the allocation of funds between the budgets of the different levels (central, autonomous and local). The Ministry of Finance is yet to present the bill to Parliament regarding the allocation of income tax.
It is unknown what share the local self-government will receive from income taxes but considering international experience, the share of local incomes in local budgets is 30%-35% whilst in countries such as France, Switzerland, Sweden and Denmark the rate reaches 75%. One of the best examples of income tax allocation is in Slovakia where 70.3% of the income tax stays in the local budget.
Even though the Local Self-Government Code directly obliged the Ministry of Finance of Georgia to prepare a bill, it did not meet this requirement. The abovementioned allocation of income tax would provide the local self-governments with even more incomes and facilitate the process of government decentralisation.FactCheck concludes that Mr Berdzenishvili’s statement: “The Ministry of Finance failed to meet the requirements of the law and did not divide the income tax between the centre and the local self-government,” is TRUE.