Iran: Private Sector Woes About Next Year’s Budget Bill

EghtesadOnline: The government needs to shift its focus from collecting tax from registered private-run businesses to tax evading companies.

News ID: ۷۴۹۳۵۹

05 January 2020

This was stated by Mehrad Ebad, a member of Tehran Chamber of Commerce, Industries, Mines and Agriculture, in a write-up for the chamber’s website, www.tccim.ir. According to Financial Tribune, excerpts of his comments follow:

Private sector players have written amply about next year’s budget bill. The government failed to take the private sector’s counsel before submitting the bill to the parliament on Dec. 9 and it is not clear whether any of the criticisms made by the private sector would be addressed during the course of the budget review.

However, two budgetary issues will have a huge impact on the private sector’s activities next year, namely taxes and subsidized currency.

Tax on Legal Entities

Government tax revenues from legal entities during the eight-month period to Nov. 21 were about 50% of the total income projected for the current year in the budget law. That is indicative of the government’s failure in generating tax revenues.

Despite that, a 20% growth in tax income from legal entities has been envisioned in the new budget bill. Such an increase won’t materialize since the recession engulfing markets will either result in companies’ negative growth or their stagnation.

The government’s foreign trade policies will lead to a sharp decline in imports and exports, a major increase in foreign currencies’ value and instability of markets, inevitably leading to losses for private-run businesses.

Special directives, which restrict imports, would definitely fail to spur growth in trade companies next year. The poor conditions of manufacturing sector will most likely worsen next year. So, how does the government expects to receive 20% more in tax revenues?

The government needs to direct its attention from collecting taxes from registered private-run businesses to companies that evade taxes.

Wealth & Import Tax

A 68% rise in wealth tax has been projected in next year’s budget bill, whereas a 15% year-on-year increase was included in the budget law for the current fiscal year (2019-20).

Does the government have a special plan to generate 68,765 billion rials (more than half a billion dollars) in wealth tax?

The government’s income from import taxes over the eight months to Nov. 21 was 25% of the projected figure for the whole year. The decline in the import of raw materials has dealt a heavy blow to the country’s manufacturing sector, increasing the end prices of products. The government should improve cooperation with importers of raw materials needed by the manufacturing sector.

Import restrictions on luxury goods might help domestic production, but it will eliminate competition from the market. In most countries, the rise in import duties, and not putting a ban on imports, is the favored alternative to help domestic production.

Subsidized Currency

Speaking of the plague of subsidized foreign currency is simply stating the obvious; even some senior government officials have talked of the corruption such a subsidy has created for the economy, yet the same officials put forward the idea of continuing this policy.

Subsidized foreign currency gives rise to rent-seeking practices. It does not promote local production and instead encourages imports. Producers have to import raw materials they need, spending foreign currency at the rate traded through the so-called secondary FX market, known by its Persian name Nima, whereas importers enjoy government subsidies. Subsidized currency has slowed down the import procedure of essential goods and resulted in the pile-up of goods at customs bureaus.

Having said that, the parliament and the government will hopefully seek the private sector’s advice and introduce budget bill reforms that would safeguard the interests of the general public rather than a few rent-seekers.