Bendukidze: Top Issue in Georgia Is Tax Take

APBendukidze, left, listening to Saakashvili announce his appointment in Tbilisi June 2.
TBILISI, Georgia -- Georgia's new economy minister said he never knew how rampant tax evasion had become here until his bodyguards asked to be paid in cash.

"They told me: 'Okay, there are two ways you can pay. You can give us cash or you can pay double on our account and we will pay taxes,'" Kakha Bendukidze said in an interview.

"They had no idea this was something bad," said Bendukidze, who took up his post this month after spending his entire adult life in Russia. "It's impossible to create a successful country where citizens do not want to pay their taxes."

The burly Bendukidze, who has never worked in government before, made a fortune running a heavy engineering company in Russia and only returned to his native country a few weeks ago.

President Mikheil Saakashvili asked him to join his young government and help breathe new life into the broken economy.

Bendukidze said restoring the rule of law is a top priority.

"The Georgian Ministry of Economic Development ... is not as important as a supreme court, the judicial system and the police," he said. "A lot of things need to be done in that part of the government and I think there is a lot of will, ability and vision for these things to be done."

Georgia, a prosperous tourist destination and wine producer under Soviet rule, has never fully recovered from the economic collapse that came with independence in 1991.

Per capita income is only $730 in this nation of 4.6 million people. A culture of endemic corruption and cronyism under veteran leader Eduard Shevardnadze, ousted last year by a wave of popular protests that paved the way for Saakashvili's election triumph, scared off investors and sapped confidence.

Saakashvili has cracked down on tax evasion with the arrest of several prominent businessmen, including Shevardnadze's son-in-law, Gia Dzhokhtaberidze, and other prominent figures in the former administration.

The number of police has been slashed and diplomats say demands for bribes from traffic police have fallen.

The construction of a pipeline crossing Georgia between Baku, Azerbaijan, and a Mediterranean export terminal at Ceyhan, Turkey, due for completion in 2005, is one of the few bright spots in a country starved of foreign investment.

Tax revenues, which account for only 15 percent of gross domestic product, have shot up by some 50 percent in recent months, diplomatic sources said.

The government still faces a huge backlog in payments of pensions and civil service salaries.

Bendukidze is hoping a new business-friendly tax code, a final draft of which he said would be ready within three weeks, will help persuade tax-shy Georgians to pay up.

"We want to develop the most business-friendly environment in this part of Eurasia, initially, and hopefully in any place in the world," he said.

The top rate of income tax will be almost halved to 12 percent and companies will pay a uniform social tax and a profit tax of 20 percent respectively. The value-added tax will be trimmed to a flat rate of 18 percent from 20 percent at present.

A draft of the new tax code will be shown to a broad cross-section of Georgian companies to make sure their accountants and chief financial officers can understand it, he said.

Bendukidze believes strong-arm methods are not enough to turn the situation around.

"It's impossible to change by putting people in jail. It's possible to change only by having a national consensus on what to do and how to do it," he added.

A fervent believer in the free market, Bendukidze said remaining state assets -- including ports and a telecoms company -- must be sold to the highest bidder.

He is against following Russia's example in the 1990s of selling assets to entrepreneurs on the cheap, something that aroused popular resentment when a handful of businessmen became hugely rich by snapping up oil and mining firms for a song.

"Selling for nothing, selling for peanuts is inefficient. It takes away too much public [goodwill]," he said.

Georgia's government should also steer clear of committing scant resources to particular industries, such as tourism.

"I oppose the idea for the government ... to have a vision about that. This vision means we are distorting free market forces."

Georgia should not squander $1 billion in funding promised by donor countries and international organizations earlier this month on projects that donor countries want but Georgia may not really need, he added.

"We need to have our priorities and explain to donors that our priorities are very important, and put money into that and not be donor-driven," Bendukidze said.