What will ensure growth of state budget revenues in 2023? Caliber.Az forecast

Judging by the preliminary forecasts of the Ministry of Finance, a significant increase in the revenue part of the state budget is expected next year, and a significant role here is assigned to the State Tax Service (STS) operating under the Ministry of Economy.

In 2023, more than half of all state revenues are expected to come from the non-oil sector, and the lion's share of revenues to the treasury will be provided by the STS, whose forecast target is increased by 14.2 per cent. What are the prospects for the fiscal authority and will it cope with this difficult task? Based on the dynamics of non-oil production and exports, as well as the rate of tax collection over the eight months of this year, it can be assumed that the new goals are quite feasible for the STS.

A favourable external environment, high energy prices, and steady growth of production and exports of non-oil products contribute to the increase of revenues of Azerbaijan's state budget. Thus, according to data from the Centre for Analysis of Economic Reforms and Communications (CAERC) in January-August 2022 domestic non-oil exports rose by 19 per cent. Sustained high export dynamics have supported production in the domestic agricultural and industrial sectors for the second year in a row: in the first half of 2022 the share of industrial zones in non-oil production was 14.9 per cent, and in non-oil exports their share reached 33.1 per cent.

All in all, domestic industry, the agricultural sector, trade, and services, as well as other economic sectors, have shown the highest growth rates in the last eight years. The country owes such positive dynamics to a number of factors, and in addition to favourable export conditions, the package of anti-crisis assistance to SMEs, implementation of large-scale state projects on the revival of the Karabakh region, and the attraction of private contracting companies to these undertakings have also contributed to the growth. All this largely contributed to the rise of the non-oil industry, which allowed relatively quickly bringing the leading sectors of the domestic non-oil sector out of the pandemic crisis. Taken together, these factors have had a very positive effect on the overall tone of the non-oil sector, supporting the economic growth of SMEs and increasing additional fiscal revenues to the state treasury.

Finally, an important factor confirming the recovery of the business climate in the country is the growth of the tax base. This is evidenced, in particular, by STS statistics: in January-July of this year, there were 8.843 thousand registered commercial entities, which is 35.3 per cent more than during the same period last year. It is noteworthy that for the period under review the number of legal entities that have resumed commercial activity increased by 21.1 per cent and the number of active VAT payers grew by 15.3 per cent. At the beginning of August over 1.370 million of taxpayers were registered in Azerbaijan, 87.6 per cent of them were individuals (6.9 per cent growth) and 12.4 per cent were legal entities (8.9 per cent growth). These figures clearly indicate the exit of the domestic non-resource economy from the pandemic crisis, stable positive trends in domestic trade and services, hospitality and tourism sectors, agriculture, production of building materials and consumer goods, other basic activities of individual entrepreneurs and SMEs.

Obviously, these sectors are the key taxable base for STS. Here it should be recalled that many of the above-mentioned positive changes were already observed last year: tax revenues amounted to 12.51 billion manats, exceeding the projected target by 117.6 per cent and increasing by 15.5 per cent compared to 2020. The situation in the segment of non-oil economy turned out to be equally effective. Fiscal payments in this segment amounted to 6.4 billion manats exceeding the forecast by 112.1 per cent and the level of fees in 2020 - by 13.4 per cent.

The said dynamics has further intensified this year. "Cumulative tax collections through the State Tax Service in January-August 2022 exceeded 9.787 billion manats, which is by 3.954 billion manats or 67.8 per cent more than in the corresponding period of 2021," Economy Minister Mikail Jabbarov wrote recently on his Facebook page.

No less important, all these positive processes are taking place amid a large-scale digital transformation of tax administration, supported by the growth of non-cash payments, legalization of the sphere of employment contracts, reducing the scale of the shadow economy, and ensuring transparency in government-business relations. In particular, over the past few years, there has been a breakthrough in the digitalisation of the STS, which has simplified the provision of tax services. As a result, the share of voluntary payments in tax revenues from the non-oil sector is now close to 90 per cent. The high growth rate of tax revenues is observed in the catering, retail, and service sectors, whereas the above-mentioned segments of the economy were not known for their transparent tax reporting in the past years and, on the contrary, turnover concealment and tax evasion were extremely common there.

Progress in this area is also related to the application of new tax administration mechanisms, the introduction of digital platforms created with the use of electronic tools, and electronic control mechanisms that increase transparency and improve the voluntariness of tax collections, among others.

In particular, fiscal services have strengthened activities to cover public catering, trade, and service entities with flexible control by introducing more than 74.2 thousand new generation cash registers (CRs) at retail and wholesale facilities. This increased the use of cashless payments by an order of magnitude, ensuring greater transparency of turnover. As the result, the turnover of CSA in January-August 2022 exceeded 15.307 billion manats, which is 57.8 per cent more than last year. It is expected that by the end of this year all trade and service facilities in the country will be equipped with CRs of a new generation. The implementation of the VAT refund project "edv geri al" had a very positive impact on the level of transparency and strengthening of civil control in trade. Thus, from the beginning of this campaign till September 2022 the volume of VAT refunded to citizens from purchases made was 305.5 million manats, and the number of citizens registered on the portal www.edvgerial-az exceeded 1.9 million people.

The reforms on the expansion of STS e-services are ongoing and in the near future, the fiscal authority is planning to launch a new portal - e-taxes: this platform will provide additional tools for efficient business activities as well as direct communication of entrepreneurs with tax authorities.

Summing up all the above facts and taking into account the forecasts of the Government and a number of international donor organisations highly evaluating the prospects of energy and non-resource export of Azerbaijan in the coming year, as well as the expected expansion of commercial and contracting activities in the Karabakh region, we can confidently say that in general Azerbaijan will manage to maintain positive trends in SME turnover and generally in the dynamics of the tax base growth. All this will enable fiscal authorities to fulfill their budget liabilities in time and in full next year as well. According to preliminary estimates, the state budget revenues 2023 will exceed 30.720 billion manats, increasing by 5.2 per cent. At that, the task of ensuring almost half of the budget revenues is entrusted to tax authorities: the projected plan on tax collection for the State Tax Service was 13.402 billion manats which exceed last year's figures by 14.2 per cent