28 March 2024

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TAX CASHBACK

Azerbaijan launches mechanism to refund VAT

Author:

01.04.2020

Global economic problems caused by the coronavirus pandemic and falling oil prices overshadowed a very important fiscal reform, which will ultimately contribute to increasing public savings. In March 2020, President Ilham Aliyev approved the mechanism declared at the end of 2018 for refunding part of the VAT in trade or service facilities. From now on, any individual with a purchase receipt and the competence to work with special information system will be able to receive part of the spent funds on his bank card.

 

Return mechanism

Azerbaijan was one of the first countries in the CIS to implement the system for returning VAT. Since the summer of 2016, authorities have successfully practiced the Tax Free system for foreign citizens. Initially, the system was introduced in test mode, and a year later it was used at all border checkpoints in the country.

130 countries of the world with applicable VAT have connected to the Azerbaijani Tax Free system. During the shopping festivals in Baku, both tourists and residents of Azerbaijan began to use this system actively. Now they can make purchases worth more than ₼100 in all stores marked with the Baku Shopping Festival-Tax Free sticker. Moreover, this amount is returned both in cash and by transfer to a bank account/card.

In normal times, to use the possibilities of Tax Free, the cost of goods purchased on one electronic invoice should not be less than ₼300 (including VAT). At the same time, within 90 days from the date of purchase, goods should be exported from the territory of Azerbaijan. After the expiration of the specified period, the amount of VAT paid for the goods is not refundable. By the way, during shopping festivals refund VAT within one day became a trend.

The VAT refund system has borrowed some of the above points, but in general it is a rather innovative solution in the fiscal sphere. Those wishing to use the VAT refund service will have to create an electronic account by registering in a special online information system. The system can be used both by local and foreign citizens. At the same time, everyone should have a bank card in national currency, since VAT is returned to the consumer exclusively by transferring to a bank card or account.

Moreover, VAT will be refunded only if there is a purchase check of new generation, connected to the electronic information system of the State Tax Service. It is recommended that you keep the check until the money reaches your account.

An application for a refund must be placed in a timely manner, no later than 90 days from the date of receipt of the check, otherwise it will be invalid. The application is activated 14 days after the receipt of the check, and information on the amount of VAT to be refunded is transmitted to the authorized bank within 5 days through a single database. The Bank then returns the required amount to the customer’s account within 10 days. The whole process takes a maximum of 29-30 days to complete.

The refund amount will depend on the method of payment. So, according to Article 165.5 of the Tax Code, a 10% refund is provided for cash payments, and 15% of VAT for non-cash payments. For example, suppose that you made a purchase worth ₼1,180, and 18% of this amount, or ₼180 is VAT. In this case, the refund amount will be up to 15% (₼27) for payments through the POS terminals and up to 10% (₼18) for payments made in cash. In other words, customers will get back 2.29% or 1.53% of the cost of a product or service.

There are some exceptions though. For example, the system does not apply to checks received from simplified taxpayers or trading facilities exempt from VAT. In addition, the amount from the purchase of petroleum products is not refundable.

 

Transparent income and expenses

In fact, the refund system applies to purchases from medium and large retailers, since small ones mostly prefer to pay taxes on simplified regime. On the other hand, the implementation of this system requires a new generation of cash registers. According to the relevant regulatory document approved by the Cabinet of Ministers of Azerbaijan, the process of installing new equipment has already been completed in large shopping centres, gas stations and network markets, as well as in wedding houses, furniture stores, and car sales stores. The entire process of re-equipment is designed in four stages, following which (until the end of 2021) cash registers will be installed throughout the country, at all trade and service facilities. In addition to issuing checks, they can also transfer information about all transactions in online mode directly to the tax service.

All these terms were valid until the coronavirus pandemic, and it is unknown how much they will be adjusted in connection with the situation. But since the country's leadership did not begin to slow down the start of the introduction of a VAT refund mechanism, most of the work has already been done.

This was announced earlier at a press conference by the Minister of Economy Mikail Jabbarov, adding that the start of the VAT refund process will help fiscal authorities strengthen public control and increase consumer interest in transparent settlements and even more in non-cash payment for goods or services.

The main goal of this mechanism is to increase transparency in trade and services. These measures will stimulate consumers to make purchases in those retail facilities where new cash registers are installed, in which profits increase accordingly. On the other hand, simplified taxpayers, seeing growing competition, will be more interested in switching to VAT payers.

Another goal is to stimulate cashless payments, which will further contribute to the reduction of tax evasion and crime and, consequently, the growth of revenues to the state budget.

This mechanism can also become the preparatory stage for the introduction of the income declaration system so popular in developed economies, which will make the life of tax officials easier, making it possible to verify incomes by comparing the monthly amount of the net declared income and the real expenses.

In addition, the introduction of proper accounting system can stimulate the government to take the next step – the introduction of differentiated VAT rates, which experts have been talking about in recent years. Accounting Chamber of Azerbaijan believes that differentiation of the VAT rate is a measure to support the development of the non-oil sector, stimulate the development of domestic production, minimize dependence on imports, and constantly encourage consumption.

As previously stated by Deputy Tax Minister Sahib Alekberov, the government welcomes practical implementation of the reform. “We even selected areas where we would like to apply differentiated VAT, but the lack of competent accounting would lead to big violations and problems. Therefore, we must first ensure accounting and only then think about introducing differentiated VAT rates,” S. Alekberov noted.

It is known that VAT is one of the most important sources of replenishment of the revenue side of the state budget. If one compares obvious financial losses due to the partial return of VAT with the legalisation of almost all financial settlements in trade and services, as well as the ability to control the transparency of income of most of the population, then the second is more advantageous for state budget. Therefore, we can say that this reform can become a powerful enough starting point for other positive transformations in the financial sector.


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