TO REDUCE OR NOT TO REDUCE?

The eternal dispute between the government and the private sector on fiscal policy is a normal and ordinary thing in any state. Entrepreneurs tend to complain about what they call exorbitant taxes, while officials claim that the rates are within permissible levels.

Discussions about reducing the tax burden are no surprise to anyone in Azerbaijan. And usually, they either cause the Tax Ministry to make some concessions, or force businesses to wait for the next discussion on amendments to the Tax Code.

While considering the package of budget documents for 2012, the chairman of the board of the Central Bank, Elman Rustamov, spoke about the need to reduce the tax burden.

From production to consumption

According to the head of the Central Bank, in the medium term it is necessary to think about reducing the tax burden in the non-oil sector of the Azerbaijani economy. The country's chief banker explains his position by the fact that with a population of over 9 million, it is impossible to build a large economy only at the expense of domestic demand. The economies of the countries, which have been developing most rapidly over the past 20 years (mostly, Asian countries), are all export-oriented without exception. "In order to access the global market, the tax burden in Azerbaijan should be competitive. To ensure a growth in foreign investment, on the contrary, the tax burden in the country should be lower than in countries where capital comes from," Rustamov said.

According to the World Bank, Kazakhstan ranks 38th in the world by the level of the tax burden, Georgia - 10th and Azerbaijan - 95th. According to the Tax Ministry of Azerbaijan, the tax burden in the country was 11.6 per cent in 2009, 10.3 per cent in 2010 and 11.9 per cent in January-August 2011.

According to Rustamov, it is necessary to consider the experience of Norway, which uses a differentiated system of taxation: taxes in the non-oil sector are lower than in the oil sector. In addition, it is necessary to shift the tax burden from production to consumption. The fact is that it is one of the main trends of tax reforms in the world today. For example, in Turkey, where the economy is one of the fastest growing in the world, taxes on jewellery, cars and so on are very high. On this basis, the Central Bank also believes that Azerbaijan should have a tax system that will direct people towards accumulation and investment rather than consumption. "Instead, we should encourage production, which creates jobs and increases the export potential. This should be done through fiscal policy," Rustamov said.

According to him, the level of social taxes in the country remains high - 22 per cent, while in Kazakhstan, for example, it is 11 per cent. To encourage production, this level must also be competitive, the head of the CBA board concluded.

Everything is ok!

Meanwhile, the head of the country's fiscal department, Fazil Mammadov, disagrees with the arguments of the chief banker. The tax burden in Azerbaijan is at an acceptable level, the minister said.

He believes that economic stability and the domestic and foreign policy of the Azerbaijani state are a much greater incentive for investment in the economy than tax cuts. And this year, over 9 billion manats were invested in the economy of Azerbaijan, in contrast to neighbouring countries where tax rates are lower than here. Moreover, domestic and private investment comprises the bulk of these investments.

With regard to the tax burden, Mammadov has his own calculations on that score. For example, he said that in view of social taxes in the EU, the tax burden in Europe is 39.5 per cent, while in Azerbaijan the figure is 21.5 per cent together with social security fees and 17.9 per cent without them.

"At a time of global crisis and economic stagnation in many countries of the world, the main economic tool to increase budget revenues is to increase tax rates, while Azerbaijan pursues a policy of reducing the tax burden from year to year," Mammadov said.

For this reason, the minister says, in the future, the taxes on the non-oil sector, compared with the forecast for 2011, will increase by 11.6 per cent against the background of the 8.6-per-cent growth in non-oil GDP. The proportion of tax revenues from the oil sector in the total tax deductions will increase from 54.9 per cent in 2010 to 55.2 per cent this year and 59.9 per cent in 2012. "It can be described as a positive fact in minimizing the oil factor in the country's economy," Mammadov said. Incidentally, the projected growth of 330 million manats in the non-oil sector will be provided from the profit tax of 151.4 million, VAT of 67.9 million, as well as income tax and other deductions of 110.7 million manats.

The tax burden, according to the minister, is greatly facilitated by numerous privileges and preferences. For example, as banks, insurance and reinsurance companies were provided with tax privileges, Azerbaijan's state budget lost 150 million manats in three years. In order to improve the financial position and capitalization of banks and insurance companies, the government has exempted part of its profits earmarked for capitalization from income tax for three years.

Also by exempting the agricultural sector from all taxes, 20 per cent of GDP in the country's non-oil sector remains outside taxation. "Due to these tax benefits in 2011, agriculture is expected to manufacture 2.4 billion manats of added value, which is 6 per cent more than in comparison with the previous year," Minister Mammadov said.

In addition, he said, tax rates have been rapidly declining in recent years, including the profit tax - from 22 to 20 per cent and VAT - from 20 to 18 per cent. In Ukraine, the VAT rate is 25 per cent, Russia - 20 per cent, Belarus - 20 per cent, Tajikistan - 25 per cent, Georgia - 15 per cent and Armenia - 26 per cent.

With regard to reducing income tax rates and changes in the limit of the monthly taxable income, the minister said: "The economic part of the country's government believes that taxes on incomes of up to 2 million manats at the rate of 14 per cent are considered normal, as they apply to most of the population. If bankers pay 30 per cent when their salary exceeds two thousand manats, this cannot have a negative impact on the welfare of the population." This is the international practice, and Azerbaijan benefits from their experience, he said.

Today the monthly income of an individual is taxed at 14 per cent in Azerbaijan, if the monthly taxable income does not exceed two thousand manats. If the income is above two thousand, they pay 280 manats plus 30 per cent of the amount over two thousand manats.

Thus, judging by Minister Mammadov's categorical remarks, no tax cuts are expected next year. But perhaps, the chief banker's proposals will be taken down and become a subject of further fiscal debates.