H1 Tax Revenues Hit $7 Billion

The Iranian National Tax Administration earned 2,310 trillion rials ($7 billion) in tax revenues during the first half of the current fiscal year (March 21-Sept. 22), says Davoud Manzour, the head of the administration.

Referring to the growing trend in INTA’s tax collection over the years, he said, “Average monthly tax earnings increased from 150 trillion rials [$454 million] in the fiscal 2020-21 to 250 trillion rials [$757 million] in 2021-22 and to 400 trillion rials [$1.2 billion] in 2022-23.”

He noted that INTA aims to fund the government’s current budget entirely from tax income in the near future, Mehr News Agency reported.

Manzour said the rise in tax earnings owes to INTA’s fight against tax evasion, identification of new taxpayers and access to a centralized database leading to more accurate inspection of the economy.

The Ministry of Economic Affairs and Finance recently announced measures taken by the government, including connecting nine million point-of-sale (POS) terminals to the national taxation system and activating another nine million POS terminals.

“As a result, the number of taxpayers increased by three million by Aug. 22 … The number of tax declarations submitted to the Iranian National Tax Administration increased from 3 million to 4.5 million [a 50% increase] by July 22," he said.

The Comprehensive Taxpayers System, which is the main platform for the implementation of the law on shopping terminals, requires all sales and purchases to be registered in the form of electronic invoices.

The government says it aims to increase the share of taxes and reduce the share of oil revenues in the public budget, as the income from the sale of natural resources, including oil, gas and mines, will be spent on the development of the country instead of being injected into the current budget.

For instance, the Budget Law stipulates that social media influencers with more than 500,000 followers who generate income from commercial activities will be subject to income tax.

Economy Minister Ehsan Khandouzi earlier communicated the directive on taxing influencers to the Iranian National Tax Administration.

“For INTA, it is not important whether the owner of the bank account is a dairy seller or a celebrity or an athlete. Artists will be exempt from tax if they earn less than 2,000 million rials [$6,000 per year]. All other celebrities who earn more must be taxed,” Manzour said.

As per the new approach employed by INTA, whistleblowing on tax evaders and other tax violations will be incentivized. Related guidelines were communicated to tax offices on Feb. 27.

The public has been asked to log on to www.intamedia.ir, report tax evasions and get a special reward.

Future Sacrificed for Budget Deficit

Bank accounts with more than 100 transactions per month and a turnover of 350 million rials ($1,060) will be considered a commercial account and subjected to tax, the Central Bank of Iran and the Money and Credit Council approved last month.

The decision raised concerns among the public.

“If the government fails to solve problems regarding budget deficit through nuclear negotiations and oil revenues, it’ll have to look for other ways. Since it does not have the expertise and technical ability to increase production and exports, it is constantly searching people’s pockets and public accounts, and making decisions based on which people will be forced to pay more,” said Morteza Afqeh, an economist and university professor, in an article for the Persian-language daily Ta’adol.

“It should be noted that 350 million rials are not a significant sum under the current economic conditions; a peddler may register such a monthly turnover, but most of this amount may not belong to the individual and only a fraction of it might account for the profit he made in that month. But the government is only looking to increase public revenues,” he said.

“Interestingly, the government spokesperson and other officials keep telling people that they have not tied people’s livelihoods to the fate of the Joint Comprehensive Plan of Action [the Iran nuclear deal]. However, they are taking measures that not only worsen people’s livelihoods, but also affect their economic prospects. People have to sacrifice their future for the government’s budget deficit. Therefore, the government has, indeed, created a close tie between JCPOA and the economy, and keeps tightening this relationship by the day.”

The economist said the economic team of the government pores into the laws of advanced western European countries in search of new tax bases, regardless of the fact that these countries collect taxes in exchange for providing services.

“Basically, tax should be determined against services extended by the government. What does this amount of tax collection mean when the country’s roads are in bad condition, Iranian planes are decades old and there’s no decent recreational activities and welfare?” he said.

“These taxes have been introduced in an economy hit by sanctions and mismanagement. The government only cares about taxing people while it fails to improve productivity at public offices; note that a large number of economic and industrial organizations are exempt from paying taxes. This type of planning amounts to direct injustice to the people. The likes of this new form of taxation is the violation of people’s rights but unfortunately the authorities do not pay attention to the fact that poverty is the end result of these types of taxes.”

Afqeh noted that high taxation hurts small businesses and increases unemployment, adding that when faced with government’s decision-making, people have no choice but to migrate to other countries or turn to non-transparent middleman economy.

“All these hit the economy hard. But sadly it seems that the government has turned a deaf ear to the warnings of economic players. The government does not improve the business environment or try to make its institution smaller, or increase the efficiency of public offices, or fight the rampant corruption in government companies. People are the ones who have to carry the price burden of all these failures," he said.

Prerequisites for Encouraging Tax Compliance

Tax-exempt status of some institutions should be canceled, sanctions should be lifted, the business environment should improve and most importantly, decent cultural, recreational and welfare services need to be provided in exchange for collecting taxes, said Ali Mazyaki, professor of economics at Allameh Tabataba’i University, in an article for the Persian daily Ta’adol.

Following the announcement of the government’s decision to tax bank accounts that have more than 100 transactions or 350 million rials (about $1,100) turnover per month, a wide range of criticisms and analyses focused on different aspects of the issue, he added.

“The government justifies this measure on the assumption that it has a widening budget deficit under sanctions regime and therefore it is unable to pay its bills such as employee remuneration, cash subsidies and capital expenditure budget. The government believes it has the right to use any capacity to tackle budget deficit but people who are going to bear this tax burden [and other taxes] have a different rationale,” the economist said.

“People didn’t ask for sanctions, or lack of efficiency of government, or the unreasonably bloated size of the government, or the rampant corruption and mismanagement in the country. They wonder why they should bear the burden of government mismanagement. After all, the first step in reducing the budget deficit and meeting the spending needs is to shrink the government and increase productivity in various sectors. But not only has the government failed to take a step toward these goals, it has recently sought to enlarge the government through the separation of ministries.”

Noting that this unproductive structure naturally requires more money, Mazyaki said that by increasing taxes, the government intends to offset the costs of sanctions, Covid-19 pandemic, lack of productivity, the size of the government, corruption and mismanagement from people’s pockets.

“Therefore, people will oppose this form of injustice. Notably, all economies that raise taxes provide services for the people in exchange, such as transportation, health and recreational services. Such an approach has never been taken in Iran’s economy; people do not know what these taxes will be used for. Why should people pay for government employees and certain cultural institutions that are redundant and unproductive?”

He believes that such a trend directs public attention toward non-transparent economic sectors and accelerates capital flight.

“There are various types of taxes around the world, including wealth tax and value added tax. They are based on a transparent system; people know what added value the payment of one dollar or one euro in tax generates. Iran’s taxation system, however, lacks such transparency and it is not clear where the tax money goes. People only vaguely know that there is a budget deficit and the expenses should be paid,” he said.

The economist noted that it is very difficult to build a culture in which people could accept this “general payment norm”.

“Even in many European countries, people resent the burden of taxes. It is only in the United States that such a norm has been internalized and tax avoidance pricks people’s conscience. Great efforts should be made to normalize this behavior among the Iranian people. But before that, transparency should be created in the economy. Tax-exempt status of some institutions should be canceled, sanctions should be lifted, business environments should be improved, and most importantly, suitable cultural, recreational and welfare services should be introduced in exchange for collecting taxes.”

Loopholes in Taxation System

According to Mehrad Ebad, a member of Tehran Chamber of Commerce, Industries, Mines and Agriculture, the government seeks to collect more tax by exercising force in three areas, including “failure to register as a taxpayer”, “hiding one’s income” and “registration of unreal expenses”.

“INTA also announced it has achieved remarkable success in the three areas of tax evasion, administrative corruption and low tax compliance. However, from the point of view of a taxpayer, administrative corruption in the process of tax collection has not been reduced; with the change of auditor, corruption has been transferred from one individual to another and the culture of receiving taxes through an agreement with the taxpayer has become more widespread among auditors. There has been no significant change in the last few decades regarding tax compliance; we have seen the decline of compliance in this field as well. According to INTA, more than 7,000 companies are operating informally; many of the companies have two offices, and they don’t consider it wise to have a single office,” he wrote for the TCCIM website.

Part of the problem, he added, is blamed on the culture of paying taxes, the culture of tax collection and the way tax revenues should be spent.

“Fundamental work should be carried out to improve tax compliance. People should be willing to pay taxes; they need to come to believe that the tax they pay will be used on the development of the country and the improvement of business environment. A large number of young entrepreneurs feel that they should avoid paying taxes as much as possible; that’s why there are so many companies that do not operate officially. Companies and economic players do not activate their economic code until they have to. Many of those who have activated their codes don’t tell the whole truth to the tax office in order to pay less tax. They prefer to spend the equivalent of the set tax to evade tax because they believe that the tax is not being spent on the right issue,” he said.

“There is a need for expert work over a long period of time to fix this problem. It is even vital to promote tax culture at the school level. At the same time, reforming the way taxes are spent should also be pursued. You can’t expect to see tax compliance improve as long as the taxes paid by the private sector are being spent on administrative and current expenses of the public sector.”

According to the law, Ebad said, tax should be used to provide welfare and public services, including education, public transportation and energy and sewage management.

“This is while the quality of these services has not improved over time; it has rather deteriorated. The experience of applying strict financial policies in other economies shows that increasing pressure on companies to receive more taxes has at times destroyed the market and deepened recession and led to the inefficiency of the economy,” he added.

Referring to the Laffer curve, which shows the relationship between tax rates and the amount of tax revenue collected by governments, he noted that the curve is often used to illustrate the argument that cutting tax rates can increase total tax revenue.

“Government officials need to pay attention to this scientific principle that they should not necessarily expect an increase in tax revenue by increasing the tax rate. Given the lack of mutual trust and the weakening of social capital in Iran, the government’s tax revenues may even decrease. By looking into the economic reforms carried out in developing and neighboring countries, we will understand that when the tax money is spent on improving the welfare of the general public, the private sector confidence in the government improves and accordingly tax revenues increase. Then the government was able to finance the whole budget through taxes.”

Ebad called for overhauling tax assessment, avoiding the application of subjective methods and trusting tax declarations.

“This is the first step in gaining the trust of the private sector even if it leads to a drop in tax revenues in the short term. In the long term, however, tax revenues will increase once tax coefficients get transparent and low, and the government prepares the ground for expanding tax bases and encourages 7,000 informal companies to submit official tax declarations. On the other hand, the complex and non-transparent tax laws should be simplified and tax coefficients need to become transparent,”

he concluded.