Iran Underground Economy's Value at Over $34b

EghtesadOnline: Iran’s underground economy, according to latest data disclosed by the Ministry of Economic Affairs and Finance, was worth 5,360 trillion rials ($34.35 billion) in the year ending March 20, 2018.

News ID: ۷۴۷۳۰۴

12 May 2019

In other words, the part of the economy that neither pays tax nor is monitored in any form by the government made up more than 36% of the country’s gross domestic product in the fiscal 2017-18.

According to Investopedia, the underground economy refers to economic transactions that are deemed illegal, either because the goods or services traded are unlawful in nature, or because transactions fail to comply with governmental reporting requirements. It is alternately referred to as the shadow economy, the black market, or the informal economy.

Primary examples of underground economic activity include untaxed labor, the untaxed sale of physical goods and smuggling of goods to avoid paying customs duties at the border, Financial Tribune reported.

Data on the value of smuggling, as part of Iran's underground economy, are scant. Latest available data show the total value of smuggled goods during the three fiscal years March 2013-14, March 2014-15 and March 2015-16 stood at $25 billion, $19.8 billion and $15 billion respectively. In the fiscal March 2016-17, the number reportedly shrank to $12-13 billion, according to the Headquarters to Combat Smuggling of Goods and Foreign Exchange. Data beyond the fiscal 2015-16 are not available.

Tax Evasion Tops $2.5b

Notably, tax evasion in Iran stood at 400 trillion rials ($2.56 billion) or 35% of the total tax revenues of the government, the Persian daily Shargh reported.

The result of tax evasion is revenue loss that may cause serious damage to the proper performance of the public sector and threaten its capability to finance public expenditure. It also creates bad models for businesses and individuals, and reduces the efficiency of resources.

It is important for governments to know how different factors, including traditional (tax rate, penalty rate, audit probability), institutional (corruption, cost compliance and confidence), socio-cultural (age, gender, education, social rules) and macroeconomic (GDP, unemployment rate and inflation), as well as businesses, including their size, ownership and industry, affect tax evasion to adjust its fiscal politics, according to a research published in the International Journal of Economics, Commerce and Management.

Poor cooperation between related institutions and agencies can also engender tax evasion. The Iran National Tax Administration requires different organizations to join the integrated Comprehensive Taxation Plan and make available information needed by INTA to plan, evaluate and control taxing operations.

However, there are many organizations and institutions that have yet to upload their information on the database and fail to cooperate with the tax authority. Banks are among financial institutions that have remained defiant despite Article 169 of Direct Taxes Law, which requires them to report information of accounts suspected of money laundering and tax evasion.

On Wednesday, INTA’s chief, Mohammad Qasem Panahi, announced that a specialized court will be set up in Tehran soon to only prosecute tax cases.

The long list of foundations and organizations enjoying tax-exempt status has also led to the expansion of Iran’s informal economy. Such untargeted tax credits, which constitute 40% of all taxable revenues by institutional and non-institutional entities, have paved the way for abuse and low compliance by other taxpayers as well as unhealthy competition between economic operators to find tax loopholes and workarounds.

Value added tax accounts for the lion’s share of total tax revenues in Iran with 23.5%, as per INTA figures, followed by corporate tax and import tax. This is while income tax makes up the biggest share of tax revenues in high-income countries. Corporate (company) tax is the second top earner of such revenues in Iran.

H1 Fiscal 2018-19 Tax Revenues

According to the Central Bank of Iran, the government’s tax revenues stood at 503.4 trillion ($3.22 billion) in H1 fiscal 2018-19 to register a 16.8% year-on-year increase.

The government’s tax revenues consist of returns from direct and indirect taxation. Direct taxes include three groups of “tax on legal entities”, “income tax” and “wealth tax”.

Overall, direct tax revenues stood at 227.6 trillion rials ($1.56 billion) during the six months, registering a decline of 1.9% over last year’s similar period.

Direct tax consists of “tax on legal entities”, “income tax” and “wealth tax”. Tax on legal entities yielded 122.2 trillion rials ($783 million) for the government, which are 12.9% down YOY.

The H1 target in the budget law for tax on legal entities was at 207.1 trillion rials ($1.47 billion).

The government collected 88 trillion rials ($564 million) from income tax and 17.4 trillion rials ($111 million) from wealth tax, which show a respective rise of 11.9% and 33.7% YOY.

Indirect taxes, including “tax on imports” and “tax on goods and services”, reached 275.9 trillion rials ($1.76 billion), indicating a 38.4% rise YOY.

The Central Bank of Iran’s report also showed tax on imports generated 73.9 trillion rials ($473 million), 79.6% more than the year before while tax on goods and services earned the government 201.9 trillion rials ($1.29 billion), up 27.7 % YOY.

It has been months since the CBI last published its budgetary reports, which include information of tax revenues as well.

Improvement in World Bank's 'Paying Taxes' Score

According to the World Bank's latest Ease of Doing Business Report 2019, Iran's score in "paying taxes" was 56.78, registering an improvement of 4.17 percentage point compared to 2018.

The Doing Business report measures taxes and mandatory contributions that a medium-sized company must pay in a given year as well as the administrative burden of paying taxes and contributions.

According to the World Bank, on average, firms in Iran make 20 tax payments a year, spend 216 hours a year filing, preparing and paying taxes and pay total taxes amounting to 44.7% of their profit, placing the country at 149th place among 190 nations.

The World Bank says Iran made paying taxes easier by introducing an online system for filing social security contributions, allowing the possibility of filing value added tax refund claims online, amending corporate income tax returns online and making payment of additional tax liability at the bank.