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In the future, a tangible drop in world oil prices may have a negative effect on the dynamics of state incomes, as well as on the accumulation of reserve funds. In anticipation of a possible negative impact, the government has undertaken a number of measures aimed at supplementing the state budget's income in 2015 by tapping additional sources. One of the steps in this direction taken by Parliament at the end of last year was to adopt amendments to Azerbaijan's Tax Code.

In particular, these amendments affect the articles regulating the sphere of indirect taxation. Thus, from 1 January this year, in compliance with the package of amendments to the Tax Code, excise duty has been increased on a number of goods such as imports of motor vehicles and yachts, gold, platinum and diamonds; the rise in excise duty also applies to locally produced alcohol and tobacco products. The most substantial amendments to the Tax Code involve tax on real estate, which affects extensive strata of the country's population. This applies in particular to the new rules relating to taxation on the property of natural persons and land tax, which came into effect in January this year.

It has to be said that in our times in practically all states in the world some kind of system of taxation on real estate owners is used. In the 1990s, when it attained independence, Azerbaijan also introduced taxes on property and land. The monetary burden on the property of natural persons and on land forms part of the local taxes, and they are collected by the bodies of local self-government, the municipalities. But for a long time these structures experienced problems with shaping a single system of accounts for the taxes collected and paid into the local budget; there were no precise records of the taxable base and the taxpayers. This muddle facilitated numerous incidents of property and land tax evasion. An effective step that radically transformed the mechanism of municipal tax collection was the amendments to the Tax Code sanctioned by the head of state in August 2014.

According to the new rules, henceforth individuals are liable to pay tax on property and land depending on its size. This transparent and understandable mechanism eliminates all the problems that the municipalities experienced in the past with regard to evaluating the inventory value of the property and, accordingly working out the amount of tax that needed to be paid. Up until recently, the assessment of the inventory value of buildings or flats belonging to natural persons was determined in keeping with "The Rules on Calculating the Value of Buildings Belonging to Natural Persons", approved by the decision of the Cabinet of Ministers 15 years ago. The tax rate was set at 0.1 per cent of the inventory value of housing.

In spite of the fact that the municipal authorities had been granted powers to re-assess the value of property, they were faced with a number of problems, and, first and foremost, they had difficulty in paying the extremely large sums charged by the assessment companies employed to carry out this process. All this, undoubtedly gave rise to quite a few complications, in particular in rural locations where the inventory value of 90 per cent of the buildings had never been determined. The latter created big difficulties, taking into account the fact that it is precisely the rural localities in which approximately 80 per cent of the municipalities' activity is involved.

Now, thanks to the amendments introduced into the Tax Code, the bodies of local self-government have gained the opportunity to calculate the tax on property fully and precisely, which will have a positive effect on the formation of the municipalities' budgets.

According to the new rules, a so-called rent form of taxation has been introduced. Taxation will be collated with the size of the property belonging to natural persons, and an area of real estate measuring more than 30 sq m will be subject to tax. Moreover, the taxable 30 sq m will be deducted from the total area, and the remaining metres will be multiplied by a certain sum, depending on the location of the object in the capital or other towns and villages in the country. Thus, the annual tax rate for Ganca, Sumqayit and the Abseron district has been set at 0.3 manats per sq m, while the rate in the settlements and villages is 0.1 manats per sq m.

The tax rate for real estate in Baku is 0.4 manats. But, depending on the distance from or proximity to the historical centre of the capital, varying rates of no less than 0.7 manats, but no higher than 1.5 manats, will be applied to property.

In the opinion of a number of local experts, the main positive element in the amendments to the Tax Code is that most of the owners of small one-room flats will be exempt from tax, irrespective of their real value or even more so their market value. The latter is in keeping with the principles of social justice. You see, in the past only flats with an inventory value of less than 5,000 manats were not subject to tax, but in reality no-one has come across such cheap flats in the last couple of years. Now flats of less than 30 sq m are exempt from taxation, and the percentage rate has been replaced by a set sum per square metre. By way of comparison, the area of a one-room flat in the so-called "Krushchev-era blocks", which comprise approximately one third of the housing in the capital, are something like 30 sq m, which means that quite a large number of the capital's residents are not subject to this tax. 

A similar scheme has been devised for calculating the municipal tax on plots of land as well, which came into force from 1 January 2015. In particular, tax rates per 100 sq m of land will be applied, while they will not only differ according to districts, but according to size - under and over 10,000 sq m. At the same time, the amendments to the Tax Code do not apply to plots of land for agricultural purposes. They apply to plots of land used for industrial, construction, transport, communications purposes, commercial and shopping premises and others, as well as to plots of land around country cottages, adjoining farms and plots of land intended for housing development.

Most experts believe that the amendments to the Tax Code that have come into effect are fully justified and not too onerous. Moreover, the money obtained from higher excise duties will be used for social purposes, making up the losses in the state budget caused by the fall in oil prices. The expected growth in income from the tax on property and land will supplement the budgets of the local bodies of self-government, and ultimately these funds will be returned to citizens in the form of repaired roads and houses, well equipped courtyards and public gardens and so forth.