Azerbaijan is considering a temporary change to value-added tax rules for used vehicles sold by official dealerships, allowing VAT to be calculated only on the dealer’s profit margin rather than the full resale price.
The proposal would apply for three years, but only to vehicles manufactured no more than five years earlier and purchased by the dealer through a cashless payment.
Economist Natig Jafarli welcomed the principle behind the measure while questioning its limits in a Facebook post.
How the Proposed VAT Rule Would Work
Under the draft legislation, an official dealer that buys a used vehicle for 20,000 manats, or about $11,765, and resells it for 22,000 manats, or roughly $12,941, would calculate the 18% VAT only on the 2,000-manat margin.
The resulting tax would be 360 manats, or approximately $212. Under current practice, VAT can be assessed on the vehicle’s entire resale price because dealers formally purchase and then resell the cars rather than acting only as commission agents.
The existing method creates a heavier tax burden for official dealerships, can push up prices and makes formal sales channels less competitive with informal transactions. The proposed change is intended to bring the tax treatment closer to the economic substance of the transaction.
Jafarli Questions the Restrictions
Jafarli said calculating VAT on the full value of a resold vehicle was unreasonable and described taxation of the margin as the correct approach. He raised three questions about the draft, however.
First, he asked why the rule would be limited to vehicles no more than five years old when a large share of Azerbaijan’s used-car market consists of older models.
Second, he questioned why dealerships would qualify only when purchasing vehicles through cashless payments. In his view, officials should explain why the same margin-based tax treatment would not apply to cars acquired with cash.
Third, Jafarli asked why the mechanism would expire after three years instead of becoming a permanent rule.
He argued that a sound tax principle should not be narrowed by so many additional conditions.
The Changes Have Not Yet Taken Effect
The provision is part of proposed amendments to Azerbaijan’s Tax Code. It has not yet entered into force, and its final terms will depend on the legislation’s adoption.
The draft says the measure could support official dealerships, improve transparency and encourage more used-car transactions to move from informal channels into the regulated market. A lower dealer tax burden, however, would not automatically guarantee lower consumer prices.
Source: Vesti Baku.