Ajaria is not Georgian President Mikheil Saakashvili's only political challenge these days. With parliamentary elections fast approaching, the Georgian government is using a carrot-and-stick approach to discourage tax evasion and corruption.
Though Saakashvili supporters are expected to win the March 28 election, an Ajarian boycott, which seems likely given the current circumstances, could damage the next parliament's legitimacy, and thus disrupt the Georgian president's reform agenda. [For background see the Eurasia Insight archive]. Even if Ajarians take part in the vote, and pro-presidential forces end up with a solid parliamentary majority as expected, Saakashvili's ability to press ahead with his reform agenda requires that the government curb corruption and vastly improve its revenue collection ability.
To boost revenue collection, the government has focused on tax reform. Tax dodging has long been practiced by Georgian businesses anxious to escape rates as high as 70 percent. Under the former president Eduard Shevardnadze's administration, a pervasive shadow economy accounted for up to 70 percent of economic activity, according to some estimates.
At a March 7 meeting with Georgia's top business leaders, Saakashvili and Prime Minister Zurab Zhvania announced a plan to encourage entrepreneurs to come clean on their companies' financial operations and pay overdue tax. Though the plan effectively works as an amnesty, the government is careful to avoid the term.
Under the plan, businesses that accurately report their income would see their tax arrears pardoned up to 1 million lari (about $486,000). Firms that owe more to the government would have to pay 10 percent of the total immediately, with the remaining payment scheduled over the next five years. Businesses would have until July 1 to make the necessary payments without incurring penalties for late payments. The plan does not apply to those companies already under investigation for tax fraud. "Our aim is . . . to legalize business in Georgia fully once and for all," the Civil Georgia web site quoted Zhvania as saying.
Since the start of the year, income reported to the government by medical supply companies has increased by 40 percent, restaurants by 37 percent and hotels by 80 percent, according to Economy Minister Irakli Rekhviashvili. The sudden increase is not surprising, given that the government has proven willing to take tough enforcement action. The government has carried out high-profile arrests that some observers say were designed to intimidate the business community into compliance. Most recently, authorities on March 16 arrested Zurab Chankotadze, the former head of Georgia's Civil Aviation Authority. Prosecutors say he will be charged with abuse of power, according to the Prime News agency.
Publicly, most business leaders have expressed support for the government reform initiatives. Privately, however, some voice concern that changes could hurt more than help stimulate business activity. Concurrent with a crackdown and amnesty, many entrepreneurs want to see the government streamline tax rates.
Beer baron Gogi Topadze, owner of the Kazbegi brewery, argued that reducing tax rates should be central to any reform initiative. "In a normal economy, the tax burden is 15-20 percent," Topadze told EurasiaNet. "In our case, it is approximately 70 percent. This needs to change if we want an improved business environment."
The Georgian parliament recently passed the first reading of a draft tax code prepared by Topadze's political party, Industry Will Save Georgia. Finance Minister Zurab Nogaideli has said that the government intends to submit its own tax reform proposals to Georgia's new parliament sometime in May.
External factors are also influencing the anti-corruption/tax evasion campaign. At a March 4 meeting with Azerbaijani President Ilham Aliyev, Saakashvili announced plans to synchronize Georgia's tax system with Azerbaijan's in order to make the country more attractive as a possible European Union accession candidates, according to Interfax. A long-term strategy would also include uniform tariffs and the elimination of visa and customs regulations between the two countries.
While the government's desire to clean up its tattered business reputation has won strong support from international financial organizations and Western governments, some international human rights groups have raised red flags. A February 2004 Human Rights Watch report, for example, accused the Saakashvili government of failing to investigate allegations of police abuse concerning the anti-corruption campaign. The government has also confronted criticism that some of anti-corruption arrests have been politically motivated.
Marina Shevardnadze, daughter of the former president, claimed that the late February arrest of her husband Gia Jokhtaberidze had purely political motives. Jokhtaberidze, head of the cell phone company MagtiCom Ltd., is facing tax evasion charges. Many Georgian media outlets have treated Shevardnadze's claim skeptically. A wide-ranging investigative report by the daily 24 Hours alleged Jokhtaberidze received a helping hand from then-president Shevardnadze to get his cell phone company started, and then capture the market from its main rival, Georgian Telekom.
In addition, A tax evasion case involving the Omega group, a sprawling conglomerate registered in the Ajarian capital of Batumi, has been linked to a political controversy. Some observers indicate that the government's move against the company is designed to assist the central government in its effort to enforce its authority in Ajaria. Aside from a news agency, newspaper and magazine, the Ajarian company owns the Tbilisi-based television station Iberia, a broadcast outlet routinely critical of Mikheil Saakashvili and generally supportive of Aslan Abashidze, the Ajarian leader.
Jaba Devdariani is a board member of the United Nations Association of Georgia and analyst of Georgian politics, currently working in Bosnia and Herzegovina.
Sign up for Eurasianet's free weekly newsletter.