Azerbaijan strengthens control over excisable goods turnover Khazar Akhundov's review

The most important purpose of the economic reforms, carried out in Azerbaijan since 2018, is to strengthen the fight against shadow turnover, and concealment of income subject to taxation. This work has yielded good results, increasing the taxable base and, consequently, state budget revenues. This vector will be consolidated, and in the near future, Milli Majlis will consider draft amendments and additions to the Tax Code (TC) to enhance control over production, trade turnover, and import of excisable goods. For the same purpose, a unified state automated information system Track and Trace, an effective tool for alcohol and tobacco market regulation, is being created in Azerbaijan.

Realizing the long-term concept of "Azerbaijan 2030: national priorities of socio-economic development", the implementation of which at the first stage is carried out within the framework of the Strategy of Socio-Economic Development of Azerbaijan for 2022-2026, the government is transforming the national economy with an aim to better include it in the international division of labour, consistently increasing the competitiveness of the non-oil sector in the domestic market and enhancing its export potential. Obviously, these objectives can only be achieved with a favourable business climate in the country and transparency in business-government relations. To this end, since 2018, the Ministry of Economy and its subdivision, the State Tax Service (STS), have been implementing consistent legislative and administrative reforms aimed at improving the business environment, liberalising tax legislation, and expanding the taxable base by bringing to light capital that has been in the shadow economy for many years.

Over the past years, the grey schemes in trade and services have been considerably suppressed in the country and production processes have been brought out of the shadow, thus ensuring fuller involvement of business entities in the sphere of fiscal control. It is worth recalling that in 2019 alone, the tax and customs authorities, by reducing the share of unreported turnover, ensured that the state budget received over 1 billion manats in excess of the forecast. Subsequently, in 2020, and especially in 2021, the increased efficiency of fiscal and customs control over unreported turnover allowed increasing additional revenues to the treasury in comparable amounts.

"The fight against shadow economy in Azerbaijan has been in the focus of attention since the beginning of 2018: the reforms implemented over the past period have brought the real wages of hired workers out of the shadow, improved fiscal control over the retail and catering sectors, and the introduction of online cash registers in this sphere and the launch of the ƏDV geri al program have significantly increased transparency and healthy competition," Economy Minister Mikayil Jabbarov said recently. The minister also emphasized that the most important direction of struggle against shadow economy manifestations is raising order in the production and trade turnover of excisable goods, in particular, tobacco and alcohol products, and in recent years in this area along with more systematic actions on the ground it was ensured special administrative measures concerning factors of informal business activity.

Steps taken in recent years to establish order in the field of turnover of excisable goods and prevention of smuggling have indirectly contributed to the improvement of fiscal accountability of wholesale suppliers of tobacco and alcohol products and large consumers of these products - restaraunts, public catering facilities, where not so long ago facts of sale of counterfeit alcohol products, non-compliance with excise marking norms, etc. were quite often observed. A positive dynamic was also achieved by strengthening control over the sphere of domestic production of excisable goods, as well as by revealing clandestine workshops, where alcoholic beverages were counterfeited, etc.

At the same time, in order to attract local and foreign investment in tobacco and wine processing, localise new production of high value-added final products in the country, and reduce foreign currency leakage, the government increased excise rates on imported cigarettes, tobacco products, wine, and brandy, etc. several times in 2019-2021. Corresponding measures were also taken in 2022: new changes to the TC came into force in January, with the result that tobacco substitutes, single-use electronic cigarettes, hookahs, and their substitutes are included in the list of excisable goods.

This large-scale work continues, and Azerbaijan intends to implement international legislation and apply modern mechanisms in the sphere of control over the turnover of excisable products. Already this year a number of amendments to the Tax Code, aimed at strengthening tax control over import, production, sale, and turnover of excisable goods are planned. The draft was recently submitted for discussion in the first reading of the Milli Majlis Committee on Economic Policy, Industry, and Entrepreneurship. The document optimizes the process of regulating the turnover of goods subject to excise and mandatory labeling, preventing counterfeiting of excisable goods and excise stamps, and ultimately contributing to the protection of consumer rights.

Among other things, the new edition of the Tax Code provides for the formation of a unified state automated information system "Track and Trace" to control the turnover of tobacco products and alcoholic beverages in Azerbaijan. The first steps towards the creation of this IT mechanism were taken several years ago within the framework of the action plan approved by the head of the state on the improvement of the export-import operations control system. About a year ago the Main Department for Control over Circulation of Excise and Labeled Goods of the State Tax Service engaged TT Technologies Ltd for the development of hardware-software solutions and implementation of legal mechanisms of the Track and Trace system under the legislation of Azerbaijan. The new mechanism was recently submitted to the Parliament for discussion.

The creation of a unified state automated information system is aimed to ensure effective control over the turnover of excisable and mandatory labelling of goods along the entire chain - from production and import to the end consumer. Such mechanisms have been in place for many years and are very effective in most developed countries, including Russia and other post-Soviet countries. Since 2007 in the framework of the agreement between EU and Japan Tobacco International (JTI) this mechanism of automated systems of serialization and aggregation has started to acquire universal characteristics as the international instrument of struggle against counterfeit manufacture, smuggling, and illicit turnover of tobacco and alcohol products.

The uniqueness of the Track and Trace system lies in its globality and, as a consequence, in its ability to connect to a common database, as well as in the availability of unified algorithms and operational solutions. At the same time, the mechanism is localised in each country in accordance with the legal framework, language, etc. The "Track and Trace" system helps to stop illicit trafficking and smuggling of tobacco and alcohol products and other excisable goods by using special barcodes, QR codes, and other digital references. And the system's algorithms enable the tracking of all products - from the production line (from a single item to a package, a consignment), controlling deliveries from finished product warehouses to distributors, retail chains, exports, including returns to finished product warehouses, thereby enabling the location of excisable goods in any location in real-time.

In a broader sense, the Track & Trace technology is a product tracking system, product lifecycle management, business processes, electronic document management, and interaction with all enterprise information systems, and Big Data databases. It is an ideal mechanism from the point of view of processing each item in the logistics chain of the wholesale trade as well as controlling the distribution and actions of the counterparties. In the future, the implementation of Track and Trace in Azerbaijan will not only generate transparency and accountability in the excisable goods market but this mechanism can also be adapted and used in other areas of the economy. For example, in the production, import, and internal trade turnover of pharmaceutical products, foodstuffs, audiovisual and book products, etc., where counterfeiting, smuggling, and illicit trafficking are also quite common.