Central Asian state tightens cashless VAT Rules to tackle shadow economy
In a major step toward expanding fiscal transparency and curbing informal business practices, Azerbaijan has introduced significant changes to its Value Added Tax (VAT) compliance framework. The new rules restrict cash payments for VAT transactions to just 2% of all payments for large taxpayers and government transactions. This builds on 2024 restrictions.
These 2025 changes are designed to reduce the volume of cash transactions that often go unreported, making VAT harder to track and enforce.
2025 Rules for Cashless VAT Payments
Under the latest amendments announced by the Ministry of Economy and endorsed by the State Tax Service (STS) two groups of payments must go cashless:
- large businesses with taxable transactions exceeding 200,000 manats (approximately €104,000) a month—particularly in trade and public catering—must now conduct payments exceeding 2% of their previous month’s turnover exclusively in a non-cash form.
- Other VAT-registered taxpayers, the threshold for mandatory non-cash payments is set at 15,000 manats (€7,800) per month. If 2% of the prior month’s turnover is less than 30,000 manats (€15,600), cashless payments must be used for any settlements exceeding that amount. If the threshold exceeds 50,000 manats (€26,000), the limit for mandatory non-cash payments is raised accordingly.
Payments to municipalities will also be monitored for compliance with cashless transaction rules.
The Ministry of Justice has been tasked with incorporating these provisions into Azerbaijan’s legal framework within three days of the announcement.
Why It Matters: Combating the “Grey Economy”
These reforms are part of Azerbaijan’s broader push to formalize its economy. Since 2019, the country has undertaken a series of legal and administrative changes to promote transparency, reduce tax evasion, and encourage digital payments. One of the main goals has been to eliminate “grey” schemes—practices such as card-to-card transfers used by businesses to hide revenue and avoid taxes.
According to the STS, such methods are prevalent in micro and small businesses, especially in sectors like food stalls, barbershops, street vendors, taxis, and small-scale retailers. These businesses often resist installing POS terminals, opting instead for informal digital payments that sidestep tax reporting obligations.
To counter this, authorities have conducted nationwide inspections targeting these practices. In early November 2024, 150 businesses—mostly in Baku—were fined for violating non-cash payment rules. Penalties start at 1,000 manats (€520) for the first violation, increasing to 3,000 manats (€1,560) and 6,000 manats (€3,120) for repeat offenses.
Broader Digital Transformation
Azerbaijan’s fiscal modernization extends beyond just payment methods. The rollout of next-generation cash register machines (CRMs) and full digitalization of tax declarations has brought 90% of non-oil sector tax payments into the voluntary compliance category. More than 100,000 CRMs are now in use nationwide, processing over 12.2 billion manats (€6.3 billion) in transactions in the first half of 2024 alone—a 10% year-on-year increase.
The country’s VAT law has also been updated to reflect evolving practices. For instance, since 2021, large purchases—like vehicles, furniture, and jewellery over 4,000 manats, and medical services over 500 manats—must be paid via non-cash methods. This requirement has reinforced the use of traceable transactions in high-value sectors.
Consumer Rights and VAT Refund Incentives
A significant part of the government’s transparency strategy includes empowering consumers. Under Azerbaijan’s VAT refund mechanism, consumers are entitled to reclaim part of their VAT spending when purchases are made via POS terminals and proper fiscal receipts are issued. This system not only incentivizes legal compliance from consumers but also pressures businesses to adhere to formal payment systems.
In 2024 alone, nearly 130.6 million manats (€68 million) were refunded to consumers under this scheme. Importantly, these refunded amounts are now exempt from income tax, further encouraging participation in the system.
The STS has emphasized that card-to-card payment methods deprive consumers of their VAT refund rights and violate consumer protection laws. Under Azerbaijan’s e-commerce and consumer rights legislation, businesses are legally required to provide POS terminals and issue both terminal slips and fiscal receipts.
Conclusion
Azerbaijan’s continued enforcement of cashless VAT payment rules reflects a broader strategy to strengthen fiscal governance, reduce informal economic activity, and align with international standards. By targeting high-turnover taxpayers and extending controls to the municipal level and smaller businesses, the reforms mark another decisive step in the country’s digital and economic transformation. While resistance remains in some segments of the economy, particularly among micro-entrepreneurs, the growing incentives for compliance—ranging from tax benefits to consumer cashback—are steadily shifting the culture toward transparency and accountability.
