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The period for refund (recovery) of VAT paid at customs during import
The period for refund (recovery) of VAT paid at customs during import
One of the issues that concerns taxpayers is the timing of the recovery of value added tax (VAT) when goods or products acquired with VAT paid during import are later supplied within the scope of VAT-exempt transactions. Altay Jafarov explained these points based on examples.
Example 1: “AA” LLC is a taxpayer engaged in the import and sale of goods. More precisely, the company’s main activity consists of importing chicken meat and selling it in the domestic market. In January 2026, the company imported chicken meat worth 100,000 manats and paid 18,000 manats of VAT to the customs authorities during the import process. The company did not make any sales in January, but in February it sold products worth 50,000 manats for 70,000 manats. In this case, what will be the outcome of the VAT paid by the company to the customs authorities? If the VAT must be recovered, in which month should this be done?
To clarify the issue, we must first refer to Article 164.1.37 of the Tax Code. According to this provision, the sale of animal and poultry meat has been exempt from VAT for a period of 7 years starting from January 1, 2020. It is clear from the article that the chicken meat sold by the company is a VAT-exempt transaction. Therefore, the sale of 70,000 manats by “AA” LLC is considered a VAT-exempt transaction and will be reflected in Appendix No. 5 of the VAT declaration for February.
When chicken or beef is purchased, VAT is paid at customs; however, their sale is exempt from VAT. Therefore, the question arises: when should the VAT paid at customs be recovered — when the goods are sold or when they are purchased?
According to Article 175.6 of the Tax Code, except for the case specified in Article 160.4, the amount of VAT paid on goods (works, services) purchased by persons conducting VAT-exempt or non-taxable transactions is not credited in accordance with the procedure established by this article. VAT paid on goods (works, services) purchased using funds allocated from the state budget (except subsidies related to assets and refundable funds) is also not credited.
From this provision, it is clear that persons selling VAT-exempt goods cannot credit the VAT paid when purchasing goods subject to VAT; instead, this amount is included in the cost of the goods. In other words, the VAT paid at customs should not be included when the goods are sold but rather at the time they pass through customs, and it must be recorded as a recovered turnover in the VAT declaration for that month.
Therefore, when “AA” LLC imported chicken meat in January, the VAT amount of 18,000 manats paid at customs should be recorded in the VAT declaration as a deductible amount. At the same time, the same 18,000 manats must be indicated in the declaration as a recovered amount and restored accordingly.
In addition, “AA” LLC will include the 18,000 manats of VAT in the cost of the goods in January.
Example 2: “BB” LLC is a taxpayer engaged in importing materials and selling processed finished products in the domestic market produced from imported raw materials used for production purposes. More precisely, the company’s main activity consists of importing chicken meat, processing it, and selling it in the local market. In January 2026, the company imported chicken meat worth 100,000 manats and paid 18,000 manats of VAT to the customs authorities during the import process. The company intended to process the imported chicken meat into special products and sell them for 200,000 manats. However, due to technical problems in the production facility, it was not possible to produce the products, and the company’s management decided to sell the imported meat in order to avoid losses. In February, chicken meat worth 50,000 manats was sold for 70,000 manats. In this case, what will happen to the VAT paid by the company at customs? If the amount must be recovered, in which month should this be done?
In this example, the nature of the transaction is completely different. When “BB” LLC imported the goods, they were not acquired within the scope of VAT-exempt operations. Initially, the goods were purchased for production purposes. Therefore, Article 175.6 of the Tax Code cannot be applied directly in this case. Later, the nature, purpose, and essence of the transaction changed, and therefore it falls under the requirements of Article 163 of the Tax Code.
According to Article 163.1 of the Tax Code, this article applies to taxable transactions of a supplier of goods, performer of works, or provider of services in the following cases:
- 163.1.1 when the transaction is fully or partially canceled, including when the goods are fully or partially returned;
- 163.1.2 when the nature of the transaction changes.
In addition, Article 175.5 of the Tax Code states that if the amount of VAT payable to the budget is incorrectly indicated in the declaration in the cases specified in Article 163, the amount of VAT payable to the budget must be adjusted in the declaration submitted by the taxpayer for the reporting period in which these circumstances arose. According to Article 163.1.2, in this case the nature of the transaction is considered to have changed. Initially, the transaction was considered taxable for VAT purposes, but later its nature changed and it became classified as imported goods used in VAT-exempt transactions.
In such a case, the next step is to apply the requirements of Article 175.6 of the Tax Code. That is, a certain portion of the VAT previously credited during import must be recovered. In this case, the recovered amount will not be treated as the cost of the imported goods but rather as an expense.
Accordingly, in our example, the VAT related to chicken meat with an import value of 50,000 manats will amount to 9,000 manats. “BB” LLC will recover the VAT amount of 9,000 manats not in January 2026 but in February. At the same time, it will be recognized as an expense for February 2026.
According to Article 175.4 of the Tax Code, if a taxpayer carries out both taxable transactions and VAT-exempt transactions in accordance with Article 164 of the Code, the amount of VAT accepted for credit is determined in proportion to the share of taxable turnover in total turnover. If the taxpayer maintains separate accounting records for goods (works, services) used in taxable and VAT-exempt transactions based on documented information, the VAT paid on goods (works, services) acquired for taxable transactions is fully credited in accordance with Article 175.1 of the Tax Code.
In both cases, the LLC will ultimately recover the relevant VAT amount in the VAT declaration based on Article 175.4 of the Tax Code.
One of the issues that concerns taxpayers is the timing of the recovery of value added tax (VAT) when goods or products acquired with VAT paid during import are later supplied within the scope of VAT-exempt transactions. Altay Jafarov explained these points based on examples.
Example 1: “AA” LLC is a taxpayer engaged in the import and sale of goods. More precisely, the company’s main activity consists of importing chicken meat and selling it in the domestic market. In January 2026, the company imported chicken meat worth 100,000 manats and paid 18,000 manats of VAT to the customs authorities during the import process. The company did not make any sales in January, but in February it sold products worth 50,000 manats for 70,000 manats. In this case, what will be the outcome of the VAT paid by the company to the customs authorities? If the VAT must be recovered, in which month should this be done?
To clarify the issue, we must first refer to Article 164.1.37 of the Tax Code. According to this provision, the sale of animal and poultry meat has been exempt from VAT for a period of 7 years starting from January 1, 2020. It is clear from the article that the chicken meat sold by the company is a VAT-exempt transaction. Therefore, the sale of 70,000 manats by “AA” LLC is considered a VAT-exempt transaction and will be reflected in Appendix No. 5 of the VAT declaration for February.
When chicken or beef is purchased, VAT is paid at customs; however, their sale is exempt from VAT. Therefore, the question arises: when should the VAT paid at customs be recovered — when the goods are sold or when they are purchased?
According to Article 175.6 of the Tax Code, except for the case specified in Article 160.4, the amount of VAT paid on goods (works, services) purchased by persons conducting VAT-exempt or non-taxable transactions is not credited in accordance with the procedure established by this article. VAT paid on goods (works, services) purchased using funds allocated from the state budget (except subsidies related to assets and refundable funds) is also not credited.
From this provision, it is clear that persons selling VAT-exempt goods cannot credit the VAT paid when purchasing goods subject to VAT; instead, this amount is included in the cost of the goods. In other words, the VAT paid at customs should not be included when the goods are sold but rather at the time they pass through customs, and it must be recorded as a recovered turnover in the VAT declaration for that month.
Therefore, when “AA” LLC imported chicken meat in January, the VAT amount of 18,000 manats paid at customs should be recorded in the VAT declaration as a deductible amount. At the same time, the same 18,000 manats must be indicated in the declaration as a recovered amount and restored accordingly.
In addition, “AA” LLC will include the 18,000 manats of VAT in the cost of the goods in January.
Example 2: “BB” LLC is a taxpayer engaged in importing materials and selling processed finished products in the domestic market produced from imported raw materials used for production purposes. More precisely, the company’s main activity consists of importing chicken meat, processing it, and selling it in the local market. In January 2026, the company imported chicken meat worth 100,000 manats and paid 18,000 manats of VAT to the customs authorities during the import process. The company intended to process the imported chicken meat into special products and sell them for 200,000 manats. However, due to technical problems in the production facility, it was not possible to produce the products, and the company’s management decided to sell the imported meat in order to avoid losses. In February, chicken meat worth 50,000 manats was sold for 70,000 manats. In this case, what will happen to the VAT paid by the company at customs? If the amount must be recovered, in which month should this be done?
In this example, the nature of the transaction is completely different. When “BB” LLC imported the goods, they were not acquired within the scope of VAT-exempt operations. Initially, the goods were purchased for production purposes. Therefore, Article 175.6 of the Tax Code cannot be applied directly in this case. Later, the nature, purpose, and essence of the transaction changed, and therefore it falls under the requirements of Article 163 of the Tax Code.
According to Article 163.1 of the Tax Code, this article applies to taxable transactions of a supplier of goods, performer of works, or provider of services in the following cases:
- 163.1.1 when the transaction is fully or partially canceled, including when the goods are fully or partially returned;
- 163.1.2 when the nature of the transaction changes.
In addition, Article 175.5 of the Tax Code states that if the amount of VAT payable to the budget is incorrectly indicated in the declaration in the cases specified in Article 163, the amount of VAT payable to the budget must be adjusted in the declaration submitted by the taxpayer for the reporting period in which these circumstances arose. According to Article 163.1.2, in this case the nature of the transaction is considered to have changed. Initially, the transaction was considered taxable for VAT purposes, but later its nature changed and it became classified as imported goods used in VAT-exempt transactions.
In such a case, the next step is to apply the requirements of Article 175.6 of the Tax Code. That is, a certain portion of the VAT previously credited during import must be recovered. In this case, the recovered amount will not be treated as the cost of the imported goods but rather as an expense.
Accordingly, in our example, the VAT related to chicken meat with an import value of 50,000 manats will amount to 9,000 manats. “BB” LLC will recover the VAT amount of 9,000 manats not in January 2026 but in February. At the same time, it will be recognized as an expense for February 2026.
According to Article 175.4 of the Tax Code, if a taxpayer carries out both taxable transactions and VAT-exempt transactions in accordance with Article 164 of the Code, the amount of VAT accepted for credit is determined in proportion to the share of taxable turnover in total turnover. If the taxpayer maintains separate accounting records for goods (works, services) used in taxable and VAT-exempt transactions based on documented information, the VAT paid on goods (works, services) acquired for taxable transactions is fully credited in accordance with Article 175.1 of the Tax Code.
In both cases, the LLC will ultimately recover the relevant VAT amount in the VAT declaration based on Article 175.4 of the Tax Code.