NATIONAL PECULIARITIES OF NON-CASH PAYMENT

The nationwide transition to non-cash payment for goods and services has been under way in Azerbaijan for the last two years. Virtually all government agencies, public institutions and many private organizations transfer staff salaries to bank cards and, almost everywhere in Azerbaijan, pensioners receive their pensions from cash machines too.

The card business has become one of the important sources of revenue for banks, and they are keen to develop this sector. Previously, turnover in this sector was enough for just one processing company, now two of them operate successfully in the market. Despite this growth, however, retail purchase by card is still quite a problem in Azerbaijan.

Three reasons for resistance to POS terminals

Pursuant to the Azerbaijani president's directive "On additional measures to improve payment systems in the Republic of Azerbaijan", dated 24 November 2005 and within the framework of the State Programme for Development of the National Payment System in the Republic of Azerbaijan in 2005-2007, retail shops and consumer service facilities were instructed to install POS terminals. There is also a Cabinet of Ministers directive, dated 3 February 2006, which set out the criteria for the installation of the POS terminals and included a graph of the stage-by-stage introduction to the various territories of the country in 2006-2007 (see the graph).

But despite this, the process is not yet complete, and it is unlikely to be completed by the end of 2008. Tax Minister Fazil Mammadov confirmed this. It appears that there are many problems in this sector.

Firstly, the commission which retail and service outlets have to pay to the banks is too high, in the opinion of F. Mammadov and his deputy Natiq Amirov. At present, the commission rate is 1.5-2% of the turnover. Of course, "extra" expenses of this nature are highly undesirable for the majority of medium-sized companies, not to mention small businesses.

Secondly - and this is also a proven fact - even though many employees and pensioners receive their salaries and pensions by bank transfer to their card accounts, the overwhelming majority prefer to withdraw cash at ATMs on the same day and are quite sceptical about using their cards in shops. "So shopkeepers have to spend money on a piece of equipment which they do not need, which is why it is difficult to force them to do it," said N. Amirov.

Thirdly - and this too is a reality in today's Azerbaijani market - despite all the monitoring efforts of the Tax Ministry, fines, sanctions, etc., many retail and service outlets still manage to evade taxes. While before, some transactions were simply not entered in the books via cash registers, today a different method is used: the receipts issued to customers show a sum which is several times lower than the real amount paid. If the sales transaction is effected via a POS terminal, this method will be curbed.

This is why even in large, upmarket shops in the centre of Baku, if you inquire about paying by card, the salesperson might answer: "We have no connection." And this happens despite the provision in the presidential directive for a good quality and stable connection for outlets where POS terminals are installed.

These problems can, of course, all be resolved if there is will to do it.

Tax Ministry up and at them

And, as happens, there is will to do it. At any rate, as F. Mammadov noted, the installation of POS terminals is a process implemented by retail outlets and banks, and the Tax Ministry only supervises it. However, from 2008 the department will implement a number of serious measures to accelerate the process.

For example, the powers of the tax authorities were broadened this year to tighten control over cash registers and POS terminals, the minister said. This means that tax inspectors will not be registering cash registers in the outlets unless they install POS terminals. "In my opinion, this is appropriate in the current situation in Azerbaijan, and increasing the number of non-cash transactions is one of the main goals for 2008 which can be achieved by close cooperation with the banks," the minister said.

Earlier, the Tax Ministry voiced its plans to introduce cash registers with built-in POS terminals. But it seems that they later abandoned this idea because businesses showed no interest in buying new equipment.

The Tax Ministry intended to introduce the combined registers at discounted prices under a special government programme.

At present, 5,500 POS terminals are in operation in Baku, and the total number in the country is about 6,000. After introduction of the equipment to all retail outlets in Baku, their number will increase by 20,000.  POS terminals will be installed in hotels, travel ticket sales outlets, bus stations and entertainment centres. Naturally, the outlets should meet cabinet-approved criteria.

"I do not think that this process will be completed by the end of 2008, but POS terminals will certainly be installed at all outlets which commence operation this year, otherwise they will not be able to register with tax authorities," said Deputy Tax Minister, Natiq Amirov.

To boost the use of POS terminals, the Tax Ministry is currently negotiating reduced commission fees with the banks. However, the banks maintain that their commission is 10 times lower than in other countries and that it is too early to change anything in this area. In the opinion of N. Amirov, the process also depends on how widely the population will use the cards: if sales revenues from card transactions increase, it will become profitable for banks to cut commission fees.

Everything will be all right!

In addition, retail outlets and the service sector have to deal with other problems like running a phone line to the cash register. Phone connections outside the capital are problematic. To avoid extra investment, which will affect the businesses' budgets, the tax ministry held talks with the Communications and Information Technologies Ministry on the installation of a special channel for the terminals. This will make it possible to establish a connection with outlets outside the capital for a nominal fee.

In the mean time, 10 to 30 POS terminals are installed in various regions of the country every month. The International Bank of Azerbaijan and Kapitalbank are actively involved in this, but electricity supply problems affect proper use of the terminals.

Public surveillance is also required to facilitate broader use of the terminals. In other words, consumers who have bank cards should demand that the retail outlets accept them.

As for the cases of tax evasion, F. Mammadov said that the tax authorities intend to continue, in 2008, the monitoring and inspection of companies which violate tax regulations, in their struggle with the shadow economy and illegal business activities. According to Mammadov, there are still such cases, and more than 4,000 legal entities engaged in illegal business transactions were identified in 2007. Under tax law, they will be fined or taken to court, depending on the amount of damages. Criminal proceedings were initiated in about 180 cases which were sent to the courts in one year. Thirty-eight persons were imprisoned for this type of crime.

Will these measures accelerate the transition to non-cash transactions? According to representatives of the Azericard processing centre, the sector started to show some signs of growth from 2006 when, in addition to the banks, tax inspectorates began to get involved in the process. So we simply have to wait until all the Tax Ministry's planned measures are implemented.