Azerbaijan’s Tax Relief on Imports: Balancing Market Prices

In Azerbaijan, the government has increasingly relied on tax exemptions for imported goods as a tool to stabilize domestic market prices. The exemption from the 18% VAT on wheat imports, extended this year, exemplifies this approach. New measures have also been introduced, including tax relief on imports of electric vehicle chargers, while exemptions for high-cost medications are currently under discussion. Notably, defense imports continue to be free from taxes and customs duties.

However, as imported food products account for a growing share of household consumption, Azerbaijani families are feeling the pinch of rising food expenses. According to the State Customs Committee, Azerbaijan imported 41,400 tonnes of meat in the first nine months of this year, up by 11,200 tonnes (36.9%) year-on-year. The value of these imports surged by $30.4 million, marking a 50.5% increase compared to the same period last year. Meat imports now represent 0.6% of the country’s total imports.

In the same period, milk and cream imports totaled 10,400 tonnes, valued at $17.3 million. This marks a rise of 1,200 tonnes (13.2%) but a 7.6% drop in value, down by $1.4 million compared to the previous year. The price discrepancy between cream and milk in local markets has led consumers to opt for the cheaper option, contributing to a notable decline in cream sales. The cost of milk and cream imports accounted for just 0.1% of Azerbaijan’s total import bill.

According to economist Rovshan Agayev, Azerbaijani citizens should not bear such a heavy tax burden on essential imports. "A significant portion of household income in Azerbaijan is spent on basic goods and services, much of which includes imported products taxed at the border," Agayev noted. He compared the situation to Turkey, where exports are exempt from taxes, and VAT is only levied on imports. In Turkey, annual import taxes totaled $39 billion in 2023, or 15% of GDP—30% lower relative to GDP than in Azerbaijan. Turkey's budget is almost entirely tax-funded, with 90% of revenues sourced from taxes, necessitating comprehensive import taxation.

In contrast, half of Azerbaijan’s budget is derived from taxes, while the other half comes from oil and gas revenues. This gives the Azerbaijani government room to ease the tax burden on imports, which could significantly lower market prices for imported food products, improving the welfare of the population, Agayev argues.

The fiscal gap resulting from import tax exemptions could be bridged by addressing pervasive bureaucratic corruption. Developing economies with significant oil and gas revenues, like Azerbaijan, are in a position to reduce or even eliminate taxes on imported food items. For instance, Argentina reduced its national import tax rate (PAIS) from 17.5% to 7.5% as of September 2, following a steep increase earlier this year aimed at boosting state revenues and cutting the budget deficit. However, the hike led to surging prices for imported goods, severely impacting the budgets of Argentina’s poorer citizens.

The continued rise in Azerbaijan’s food imports highlights the shortcomings of the government’s agricultural policy, particularly its reliance on large agribusiness holdings often linked to oligarchic officials. These agroholdings, intended to address domestic food shortages, were established by reallocating land leased by small farmers, many of whom were forced into bankruptcy and low-wage urban jobs. Meanwhile, the owners of these holdings have reportedly concealed a portion of their profits in foreign banks. As a result, the government has been compelled to import basic foodstuffs, passing the VAT burden onto the already strained finances of the population.

State Statistics Committee data indicates that in the first half of 2024, food imports amounted to $1.13 billion, up by $73 million, or 6.9%, compared to the same period in 2023