Majlis Enters the Fray: Unending Contention Over Car Imports

EghtesadOnline: Using insider information and the benefits of cronyism, some auto importers have made fortunes from the volatile import rules and the chaotic market over the past two years. To address the matter lawmakers on Monday passed a bill to impose a 60% tax on organizations and companies that benefitted from the windfall.

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10 February 2018

Proposed by Mohammad Dehghan, the bill was approved by 163 MPs from the 242 present in the chamber. The revenue generated from this tax is to be spent on creating jobs and industrial development, the parliament’s news portal ICANA reported.

The bill, among other things, calls on the General Inspection Organization of Iran, affiliated to the judiciary, to supervise the process. The bill will be signed into law after approval by the Guardian Council.

Dehghan said, “Auto import rules have changed several times over the past two years. For instance, thousands of online auto import permits were issued in a few days, and suddenly out of the blue, the online service was shut down. The service was relaunched albeit with a caveat. Import tariffs were increased exorbitantly, according to Financial Tribune.

According to separate reports by the Majlis Research Center, Majlis Article 90 Commission (which handles complaints) and GIO, some car importers made millions of dollars by exploiting the volatile situation and using insider information,

As per the bill, 60% of such earnings (obtained by dubious means) must be taken away by the government and be used for improving the manufacturing sector and job creation.”

The GIO and Iranian National Tax Administration will be given a mandate to identify companies with such incomes, the legislator said.

An adamant supporter of the bill is Mostafa Kavakebian. On several occasions in the past two years he called on Majlis Article 90 Commission to investigate auto imports undertaken through cronyism and questionable means. But it seems his pleas fell on deaf ears.

Spokesman of the Parliament’s Energy Commission Assadollah Gharakhani said, “The Majlis has initiated a probe into the status of the online auto import registration website, customs duties, and the long list of restrictions on car imports.”

In his opinion “Due to the recurring changes in auto import rules prices of foreign  vehicles are going through the roof.”

Gharakhani claims that the government did not announce the new tariffs openly and instead shut the online registration website for months. “Using inside information, avaricious car dealers and importers profited” from the near lawlessness and entropy in the market.

Volatile Situation

What lawmakers are now condemning as an unwanted volatile situation and with the government whimsically changing rules, is nothing new as there are many examples in the past reflecting how the imported car market is disrupted at short intervals that without exception result in one thing: Increase in prices.

Last winter authorities in Tehran suddenly put an end to gray imports of vehicles depriving the sector of almost half the resources and channels used for auto imports. During the last fiscal that ended in March 2017, almost 50% of the cars entering Iran were imported by companies involved in such imports.

At that time officialdom claimed it was doing so to help protect customers’ rights and that “gray importers were not offering after sales services.”

This is while as per previous rules such importers were obliged to pay 3% of the value of the car to the official representative or distributor of the foreign firm in Iran so that it offer after sales services on their behalf.

Halting Online Registration

In June 2017 the online auto import registration website locally known as Sabtaresh was shut down by authorities.

As per law, after getting import permits from the Industries Ministry, local firms must also register online with the Trade Promotion Organization separately for every single unit.

In response to public pressure, TPO director Mojtaba Khosrotaj criticized “the unbridled auto imports” saying “During the first five months of the current fiscal  38,000 cars were imported costing $1.4 billion.” During the same period last year, 26,359 vehicles entered the country. The number is a 44% YoY jump in imports.

Khosrotaj was then quoted as saying that “The online application system will not be reopened until the government announces new rules for auto imports.”

However his comments drew fire from the head of the Auto Importers Association, Farhad Ehteshamzad. “Shutting down the online registration system has no legal justification. If the ministry wants to change the guidelines it must first follow legal procedures.”

According to rules, before the introduction of any new directive the government cannot change or suspend existing procedures.

Unending Fracas

After six months of squabbling over suspension of the online auto import registration system, the government passed an amended version of auto import rules in the closing days of 2017 and the website was reopened in January. However, this was not the end of the story.

As per the new import rules that many have censured as draconian, custom duties on vehicles have been increased 15-60% and new restrictions have been imposed on car imports. For instance, vehicles costing more than $40,000 cannot be imported and sold in Iran.

Furthermore, in an unexpected move the customs duty for hybrids was increased significantly from 5% to 45-65% depending on the vehicles gasoline engine capacity. The sudden hike has led to a public outcry. Lawmakers realizing the damage the new rules can and will do, have called on the government to rethink its decision and stay loyal to its oft-mentioned green policy.

In response the Ministry of Industries has sent an amended version of auto import rules to the Cabinet that says import tariffs on hybrid cars be cut and based on vehicle fuel consumption and emissions.

Government Narrative

Policymakers and some government officials complain that Iran’s large auto import bills have become a prohibitive enterprise the struggling economy simply cannot afford.

However, the absurdity is that government has given the green light to semi-state owned carmakers to import auto parts in large quantities. Import tariffs on auto parts vary between 15% and 20%.

Auto imports during the nine months to Dec. 21 stood at about $2.9 billion indicating a 50% year-on-year. According to Islamic Republic of Iran Customs Administration, auto parts had the largest share of the import bill (4.58%) followed by cars and heavy-duty vehicles (3.11%).

During the nine-month period, parts worth $1.72 billion (up 96.28% YoY) and, cars and heavy-duty vehicles with a total value of $1.16 billion (up 12% YoY) were imported.

The government’s opaque measures aimed at curbing capital flight have failed to produce the desired results and led (as usual) to market disruption and higher car prices. After the new customs duty on cars was imposed, the number of cars entering Iran has not declined. The only visible change has been that people are now forced to dig deeper into their pockets if they want a decent ride.