PRESIDENTIAL GUARANTEES FOR BUSINESS

A package of budget-related laws for 2016, which was approved in Azerbaijan's Milli Maclis [parliament] last week, could be rightly called the most memorable one over the past few years. This is not because of the parameters of the state budget for next year, which have been amended to match the current situation, but documents that were adopted in parallel with it, in particular, amendments to the Tax Code and the legislative initiative of President Ilham Aliyev towards a two-year moratorium on inspections of entrepreneurs. Both of these documents aim to support the domestic private sector at a time of crisis tendencies in the region's economy and, more than that, to serve as a sufficiently powerful catalyst for positive change to enhance the share of the non-oil economy in state revenues.

Budget package

Let's start with the budget. No particular amendments were made after the debates in parliament to the basic parameters of this country's state budget, which were put together based on an average oil price of 50 dollars per barrel. Accordingly, the revenues were approved in the amount of 14.566bn manats (a 25.1-per-cent decline compared to the forecast for 2015) and expenditures 16.264bn manats (a 22.9-per-cent decline), and the resulting deficit of 1.698bn manats will constitute 2.9 per cent of GDP.

Meanwhile, Finance Minister Samir Sarifov said that after the discussions of the draft budget in parliament that certain adjustments were made to the expenditures of the consolidated budget for 2016. In particular, it was decided to increase spending to improve accommodation and living conditions for refugees and internally displaced persons in 2016 by 50 per cent to 150m manats, which is planned to be done through a 50m-manat increase in the expenditures of the State Oil Fund [SOFAR]. Thus, he said, the upper limit of the expenditures of the consolidated budget in 2016 will be 19.956bn manats, and the deficit in the consolidated budget without SOFAR's revenues taken into account will be 9.948bn manats.

As for the state budget, the bulk of state revenues (6.6bn manats) will come from the Tax Ministry, 1.6bn manats from the State Customs Committee, and 6bn manats from the State Oil Fund.

Like in previous years, expenditures will be mainly socially-oriented: of them, 1.1bn manats will be transferred to the revenue part of the budget of the State Social Security Fund (SSSF), which was also approved as part of the budget package. The revenues and expenses of the SSSF will be 3,078,600,000 manats (0.7 per cent more than in 2015).

Also, according to the approved draft law "On the subsistence minimum for 2016", living wage will be 136 manats.

I should add that during the discussions in parliament the government said once again that the reduction in spending would mainly affect non-urgent infrastructure projects and will not affect the welfare of ordinary citizens.

Revolutionary decision

However, in the years to come, the private sector will provide most of the revenue of the budget. The government's main goal is to make sure that there is freedom for development of business. President Ilham Aliyev made a rather stern speech at the session of the Cabinet, which was held to discuss the results of the socio-economic development of the country over nine months. He said that it was an unsatisfactory situation that state agencies interfered in the work of the private sector. He categorically demanded that the government should address these problems within the shortest period of time possible. A short time later, the head of state himself came out with a legislative initiative to introduce from 1 November 2015 a two-year moratorium on almost all inspections of entrepreneurs, except for tax inspections and inspections in the event of threats to the life and health of the population and to the national and economic security of the country.

In addition, this law does not apply to inspections carried out by the Prosecutor-General's Office to fight corruption.

The approval of this law in parliament was preceded by a presidential decree, which said that licences for all kinds of business activities in Azerbaijan, with the exception of matters relating to state security, would from now on be issued by the Economy and Industry Ministry. The president instructed the ministry to minimize the number of business activities that require licensing, to simplify and increase the transparency of this process and to render licence issuing services at ASAN Service offices.

Azerbaijani Economy and Industry Minister Sahin Mustafayev called the law a "revolutionary decision" that helps improve the business environment and create more favourable conditions for entrepreneurship. He said that appropriate measures would be taken immediately against people conducting illegal inspections. "I once again would like to address entrepreneurs. If they face these kinds of situations, they must report them through the hotline of the Economy and Industry Ministry," the minister said.

It is clear that it is mostly small and medium-sized businesses that will benefit from this law. And it is these business that, in a market economy, are meant to be the foundation for the formation of the country's GDP. Yes, the share of the non-oil sector in GDP is growing, and forecasts for next year say that the share will even reach 71 per cent, but the role of this sector in the formation of state revenues is fairly weak. The elimination of artificial problems created by state agencies for businesses may now encourage entrepreneurs to develop business and establish companies. This is a powerful impetus generated by the most recent decisions taken by President Ilham Aliyev, who switched the "green light" on for entrepreneurs. From now on, there is one thing required of businesses - to work honestly and pay taxes and social contributions on time.

Tax Code

Incidentally, there will also be fairly serious amendments to taxes next year. The amendments aim to reduce as much as possible tax evasion by entrepreneurs and to simplify tax calculation mechanisms. I should point out that the amendments to the Tax Code were also approved as part of the budget package, whereas in previous years this was done separately and closer to summer. In this particular case, the parallel adoption of such important pieces of legislation, which are directly related to business activities, may be regarded as the start of serious reform.

Under the amendments to the Tax Code, business people operating in Azerbaijan in the fields of trade or catering, will be able to pay simplified tax, regardless of the amount of their turnover (currently, this kind of a tax is paid by entrepreneurs, whose turnover does not exceed 120,000 manats over 12 months) . The rate of simplified tax for entrepreneurs engaged in trading activities has been set at 6 per cent of their turnover, while for entrepreneurs working in catering at 8 per cent of their turnover.

According to Tax Minister Fazil Mammadov, these amendments help to enhance the transparency of the turnover of entrepreneurs operating in these fields, expand the tax base, and increase state budget revenues.

In addition, penalties have been increased five-fold for violations by trading and catering entrepreneurs of regulations regarding cash payments, such as sale of goods or services without giving a receipt.

Under the amendments, there will also be a new tax in the amount of 10 per cent on gains in sports betting. The minister said that the decision is quite reasonable given that the annual turnover in this field has reached 300m manats.

In addition, legal entities and individuals engaged in housing construction in Azerbaijan have received the right to pay simplified tax only.

Another amendment - the expansion of the reach of benefits for income tax - will apply not to entrepreneurs only but to all citizens of the country who work and receive a salary. According to Finance Minister Samir Sarifov, this will help increase monthly incomes in Azerbaijan for over 500,000 people by an average of 3-9 per cent. Here is the reason why. Until now, a salary under 250 manats was subject to income tax on the amount exceeding the subsistence minimum for the able-bodied population (140 manats). When a salary was higher than 250 manats, income tax was applied to the whole amount. Under the amendments to the Tax Code, from next year, a salary under 2,500 manats will be taxed 14 per cent only after the deduction of the non-taxable part in the amount of subsistence minimum.

There are no changes planned for highly-paid employees with a salary of more than 2,500 manats - they will be paying 350 manats (14 per cent of 2,500 manats) plus 25 per cent of the amount over 2,500 manats.

The amendments to the Tax Code, which will come into force on 1 January 2016, will also expand the powers of the Tax Ministry. The ministry will have the right to ask courts to impose a ban on foreign travel for tax debtors, in particular company managers.

So, it is quite realistic to achieve an increase in the share of fiscal contributions to the state budget through making improvements to tax legislation and, in parallel, tightening control over its implementation.

Here, I would like to mention one more legislative sensation of October, which is closely interconnected with those described above. Last week, Azerbaijani President Ilham Aliyev signed a very important decree that provides for a simplification in customs procedures. From now on, every individual will be able to bring into the country goods that are not intended for manufacturing or commercial purposes worth up to a total of 10,000 dollars, plus 2,000 dollars worth of goods for each accompanying person under 18, without paying customs duties.

An exception is the import of excisable goods, vehicles and items that a person requires to meet their needs during journeys.

This decision also aims to rid citizens of excessive bureaucratic procedures, reduce the number of checks, which, in turn, will improve the welfare of the people. In addition, the facilitation of the border crossing procedure will make it possible to rid checkpoints of congestion and prevent attempts of goods smuggling.

It is obvious that the government is even further stepping up its involvement in the development of entrepreneurship in the country, and revolutionary decisions, coupled with a categorical political will for their unquestioned implementation, cannot but have a positive impact towards the development of small and medium-sized businesses. As the saying goes, every cloud has a silver lining, and the decline in the oil revenues of the state budget encourages a transition of the economy to a new stage of development and will speed up its diversification. In turn, this means achieving long-term stability regardless of external factors.