Over the last two decades, the tax treatment of small Georgian businesses has varied extensively with the application of different presumptive tax regimes. These experiences have been rather unsatisfying, being both a reflection of the challenges of taxing this sector of the economy and the uncertainty among policymakers regarding the appropriate design of presumptive tax regimes.<sup>14</sup> In an early attempt to simplify the taxation of small traders, an area-based presumptive tax regime was introduced in 1994-95. However, the system faced common problems of size-based indicators, namely weak correlation with turnover and profitability, as well as loopholes facilitating abuse. The regime was abolished in 1996. A new presumptive “patent” system was adopted in 1998, distinguishing a number of different trades.<sup>15</sup> For a patent system with lump sum payments this approach did not sufficiently differentiate between business activities and, not surprisingly, performed poorly in terms of revenues.<sup>16</sup> Subsequently, the regime’s categories were extended to more than 30, yet the performance continued to be unsatisfactory in terms of revenue generated. This was partly due to the lack of information on actual profitability in different sectors and the resulting non-alignment of tax payments with the liabilities under the regular tax regime. The introduction of a simplified turnover tax was attempted in 2001, but rejected in parliament because the proposed single rate of 7% was seen as too high (Engelschalk 2004). Instead, with the adoption of the new tax code in 2005, a single tax treatment for all taxpayers with same rates and compliance requirements for micro, small, medium and large taxpayers was introduced.

While such a single tax regime for all businesses ensures a consistent tax environment, the result of using the same provisions for large and small firms is a comparatively higher relative compliance burden for small businesses. After the reform in 2005, taxpayer perceptions, captured in a World Bank survey, improved dramatically among large businesses with a drop from 26% in 2005 to only 4% of respondents in 2008 pointing to tax administration as a constraint for their operations (see Figure 1). For small firms, however, the trend went in the opposite direction; the share of small businesses that identified tax administration as a key barrier to doing business, rose from 11% in 2005 to 20% in 2008. With the objective of reducing administrative and taxpayer compliance costs in order to encourage participation of micro and small taxpayers in the formal economy, the GoG decided to re-introduce a presumptive tax regime in 2010. Subsequently, in 2013, taxpayer perceptions improved dramatically among small business respondents to a World Bank Survey, though they worsened among medium sized taxpayers.<sup>17</sup>

> 14 See discussion on Georgia in Engelschalk (2004).

> 15 Retail trade, goods production, services, transportation, jewelry shops, repair of watches, as well as an indicator based tax regime for restaurants

> 16 Presumptive tax collection was only GEL 5 million or 0.7% of total tax revenues in 2000 (see Engelschalk 2004)

> 17 It is, however, unlikely that the changes in perception were solely driven by the (re-)introduction of a simplified presumptive tax regime given that many respondents to the survey have likely not registered for the regime  (see table 4 below). A number of additional reforms aimed at improving taxpayer experiences were adopted in 2010, including for instance a revised tax appeals process.

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