FAVORED STATUS: IT ZONES

The Georgian government anticipates the new tax benefits for IT companies will jumpstart development and job growth.

Maia Edilashvili

A new Georgian law will exempt IT companies from most taxes and bring major technology firms to Georgia, the government hopes.

The initiative is similar to the successful Dubai Internet City, which offers 50 year exemptions on personal income and corporate tax. Georgia already has two industrial zones – one in the port city of Poti and another in Kutaisi, in west Georgia.

According to Nikoloz Mchedlishvili, PM Nika Gilauri’s spokesperson, the IT zone is a perfect fit for the government’s drive to create jobs and attract foreign investment.

He noted that it doesn’t take a lot of initial investment to create a successful IT company since an IT specialist “just needs a laptop to create a valuable product.”

“There will be an opportunity to generate high earnings at a very low cost,” he told Investor.ge.

According to the draft law, created by the Ministry of Finance, any company that produces computer programs or systems – as well as other types of “information technology” - will be eligible to apply for a special, “IT Zone” status.

The status provides exemptions for profit tax (15 percent) and VAT (18 percent).

The government will also be authorized to fund or co-finance an IT company and the status will be issued by the Information Exchange Agency, based in the Ministry of Justice.

Under the current draft, only employees will be responsible for paying taxes to the state in the form of a 20 percent income tax.

More Demand, More Jobs

Georgian IT companies are supportive of the planned IT zones.

IT managers note, however, that Georgia will need more education – and a more competitive labor market – to make the zones a success for local players.

According to Giorgi Chirakadze, president of UGT, one of the largest IT companies in Georgia, education is where the biggest challenge lies.

“We do have IT specialists, some with very high skills, but their number is very few which makes their cost too high,” he said.  “In some cases, specialists with the same qualifications as [their colleagues] in Armenia or Bulgaria – not to mention India – are by far more expensive in Georgia.”

Representatives of Azry face the same problem.

Both UGT and Azry have experience working on international projects. UGT recently opened an office in the United States and Azry sells its goods to markets in Central Asia and Africa.

According to Chirakadze and Davit Japaridze, manager of Azry, there are simply not enough Georgian IT specialists receiving the training and education necessary to fill the demand.

“The IT language in Georgian was created in the early 1990s so there is the lack of high-qualified trainers,” explained Japaridze.

“The demand [for IT professionals] is high but the market supply is low because this profession is not popular in Georgia.”

Zurab Janiashvili, the executive manager of Azry, believes hundreds more specialists should be graduating from Georgian institutes and universities every year.

He noted that “just a few hundred IT specialists” graduate annually, while “one thousand” would be the “optimum.”

“It would be wise if the Ministry of Education started organizing summer camps for schoolchildren to introduce them to an IT specialist’s job and advantages,” Janiashvili said, adding that the increased access to IT skills could help attract potential specialists from outside of Tbilisi.

“99% of Georgia’s whole IT market is concentrated in Tbilisi, while in the villages young people are standing idly in the streets, eating sunflower seeds.”

Up, Up and Onward

IT professionals in Tbilisi believe the sector is primed to grow, given the right circumstances and conditions. But a formulated policy, not just VAT exemptions, are needed.

According to the Georgian National Communications Commission’s annual report, turnover in Georgia’s electronic communications market reached 1.25 billion lari ($679 million) in 2009 and the sector’s share of GDP was 6.9 percent – a 0.3 percent increase from 2007.

“Those Georgian companies which produce programs are very few – around 15 including small companies,” Irakli Kashibadze, chief of the Department of Communications and Information Technologies at Ministry of Economy, said.

Kashibadze, whose department is responsible for developing the policy for the IT sector’s growth, agrees that a thriving IT industry in Georgia requires more than just tax breaks.

He said members of his department have met with all the Georgian IT companies that export products and services. The department, he noted, is well aware that the biggest challenge for Georgian IT producers is more specialists with better skills.

Members of his team, according to Kashibadze, have researched the local market and IT success stories – like India – to determine what will work best for Georgia. A draft policy is set to move to the Ministry of Finance and the Ministry of Education for approval.

Attracting Market Leaders

An important key to making the zone work will be the government’s ability to attract big names to Georgia’s new zone, and make the country more attractive to industry leaders.

“Azerbaijan and Armenia have better positions for the IT sector for certain reasons. Due to oil, there have always been many multinational companies in Azerbaijan, which needed software programs and this boosted the market. In Armenia, we should consider the huge Diaspora which are successfully lobbying Armenian companies to sell their products overseas,” Zura Janiashvili, Executive Manager at Azry, explained.

“Georgia has none [of those conditions]. So introducing special incentives to encourage this industry is a very wise decision.”

According to Mchedlishvili, Prime Minister Gilauri met with the HP representatives which “see Georgia as one of the priority destinations.”

He added that CEOs are “very mobile people,” so the idea of resettling in Tbilisi for cheaper tax rates is a reality.

Japaridze noted that the zone will have the added attractiveness of a quick turnaround for any sort of business – local or international.

“IT products are easily exportable; the business is very dynamic, which allows a rapid success,” he said.

“In five or 10 years we will be able to yield a return.”

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