Analysis: VAT Vacillation

EghtesadOnline: Pundits and economic experts looking closely at the key insurance sector are prone to ask one question: Why should the insurance industry be exempt from value added tax as some quarters have been demanding?

News ID: ۷۴۸۴۰۲

11 September 2019

Over the months a debate is going on between fervent supporters and strong opponents of VAT, especially for the insurance industry. Subscribers to the latter school tend to believe that the nine percent VAT is untenable, a hindrance and has enough potential to hurt the industry as people become less inclined to buy insurance policy for themselves (life insurance), their cars, homes and businesses.

In their view VAT has another major minus in that it tends to undermine the socio-economic safety net. It needs mention that large sections of Iranian society are averse to VAT and see it as a pain whenever they buy, sell, pay for goods and services or go to the eateries.

Insurance in all its forms and manifestations is an industry in Iran that is growing at its own slow pace, in particular for homes, businesses and fire insurance. It has been of the ascending order in the past two decades as private insurance firms emerge to compete with what once was an exclusive premise of the state, according to Financial Tribune.

Safety and Support

Proponents of VAT stress the support and safety aspect of the insurance sector for business and manufactures, and say given its role and significance, policy and decision makers need to tread with more care in reforming, regulating or reinventing VAT policy and all that is related to it.

“The bottom line is that VAT is a consumption tax,” says Sohrab Sayyari, a tax consultant, and adds that almost 160 counties in the world use this system. “Why should Iran be an exemption? VAT raises government revenue, which in turn is used for development and economic expansion,” he told the Financial Tribune.

The controversy, for the matter, starts from this point, it does not end here. Critics rush to draw parallels between this type of tax and the so-called “regressive tax” they claim is an extra burden “common folks and businesses can do without.”

Payman Sayyadi, a tax consultant admits that he cannot agree more with those against whatever “is claimed to be good in and for VAT” in the present conditions.

Without indulging in clichés regarding the need for taxes and tariffs that are being levied by the government when the economy is struggling, he says for “all practical purposes VAT visibly targets consumers and demand for goods and services.”

Undermining Demand

Speaking to the Tribune, he argues that in whatever sector “this tax is levied it automatically leads to higher prices and thus undermines demand.” For example, collecting VAT from the vehicle insurance industry can and will result in declining demand for “this necessary service” from car owners. The same can be said for the life insurance segment that has a minuscule role in the insurance industry as such.

It is in this context, experts recall, that almost nine million cars and motorcycles do not have the so-called third party insurance policy, which by the way is mandatory as per law. Large part (about eight million) of the vehicles is two-wheelers.

A key issue that must be answered by proponents of VAT is to what extent this form of tax is in reality contributing to sustainable development and the well-being of society at large.

They also need to respond to other key queries, namely the role of VAT in the insurance industry in improving the business climate, creating jobs, help during natural disasters, financial inclusion, aging populations, and safeguarding the environment.

Given the economic conditions and growing challenges that domestic businesses and manufactures are struggling with, strong proponents of VAT will encounter hard times simply because this tax has earned a negative connotation in Iran and many other countries where it has been introduced.