Tax on Production Sector to Shift to Consumers

EghtesadOnline: A 4-5% decline in the production sector’s tax rates has been envisioned in the next fiscal year's budget (March 2021-22).

News ID: ۷۵۱۰۰۱

15 September 2020

"Tax on consumption, however, will increase next year," Mohammad Baqer Nobakht, the head of Plan and Budget Organization, was quoted as saying by Mehr News Agency.

The Plan and Budget Organization held the first meeting of the so-called Budget Headquarters 1400 (the Iranian year starting March 2021) on Aug. 22.

Discussions centered on the makeup of the headquarters, the Joint Commission—a parliamentary body responsible for reviewing the budget bill as well as the five-year economic development plans—and eight specialized taskforces.

These meetings are being held regularly up until Budget Day (the day the government presents its budget to the legislature for approval), i.e. Dec. 2.

Budgetary Woes

With a freefall in oil prices and the spread of the new coronavirus, the government is getting more and more worked up every year, especially due to the fiscal burden of sanctions and the decline in oil sales.

In the fiscal 2019-20, the relatively smaller size of the budget deficit, the availability of foreign exchange reserves from the National Development Fund of Iran and the untapped potential of debt bonds prevented the deficit’s aftereffects from impacting the economy to some degree.

In the current fiscal year (March 2020-21), the widening budget deficit, the reliance of budget on financial bonds, the drastic fall in oil prices, petroleum products, tax revenues and the mounting costs of coronavirus outbreak are bound to compound the government’s economic woes.

Masoud Khansari, the head of the Tehran Chamber of Commerce, Industries, Mines and Agriculture, said recently the government is in the red to the tune of 1,800-2,000 trillion rials ($6.8-7.5 billion). He said the deficits have been partly compensated by the bond market.

Taxation in the Spotlight

Due to the economic problems and devastating impact of the coronavirus pandemic, the government’s success in raising taxes is apparently limited after businesses were hit hard and many closed down.

Tax rates will increase by 28% on average in the current fiscal year (March 2019-20), the head of Iran's National Tax Administration, Omid Ali Parsa, said recently.

"In underprivileged provinces, the rate will be lower. For instance, Lorestan and Ilam will see a 15% growth. However, taxes in Tehran will rise by 32%," he was quoted as saying by IRNA on Thursday in a meeting with business owners in the southern Kerman Province.

"The taxation system is moving toward imposing heaviest rates on higher income deciles while minimizing levels for those with modest means," he added.

Parsa said INTA earns 120 trillion rials ($455 million) in tax revenues (direct and indirect) on a monthly basis.

“This is while the government's general spending is at 280 trillion rials (over $1 billion) per month,” he said.

"About 8% of the Iranians' income are put at the disposal of the government [in the form of tax]. The global average is at 30%. At a time when oil revenues have declined, the government has no choice but to count on tax revenues."

The Sixth Five-Year Development Plan (2017-22) targets an 8% share of tax revenues from GDP by March 2022, which currently stands at 6%.

At present, revenues gained from tax are at least 1 quadrillion rials ($3.8 billion) behind the goals of the development plan, Fars News Agency reported.

Iran’s development plans outline government strategies in budget planning for the next five years.

Experts say the reason for this disproportion in tax revenues’ share in the country’s GDP is that some 50% of the Iranian economy enjoy tax exemption. This is to be topped by rampant tax evasion and faulty taxing methods.

According to the INTA chief, 40% of Iran’s economic players are exempt from paying taxes.

Besides tax exemption, the government budget in Iran also suffers from widespread tax evasion.

Gholamali Jafarzadeh Imenabadi, a member of Majlis Plan and Budget Commission, has put the size of tax evasion at 400,000 billion rials ($1.5 billion) annually.

Imenabadi noted that the value of tax exemption and tax evasion together is over 1,000 trillion rials ($3.8 billion).

Independent observers estimate the figure much higher.

According to Parsa, tax revenues’ share in budget increased from 37% in the fiscal 2018-19 to 54% in the last fiscal year, Mehr News Agency reported.

“The average growth in tax revenues over the past five years was 21%,” he said.

INTA is also considering taxes on empty homes, luxury homes and pricy cars.

The Iranian Parliament approved on Aug. 5 revisions to Article 54 of Direct Tax Code (vacancy tax), based on which empty homes in cities with a population of over 100,000 will be taxed after four months, based on their assessed rental income tax on a monthly basis.

The owners of these properties will have to pay six times more than the rental income tax in the first year, 12 times more than the rental income tax in the second year and 18 times more than the rental income tax in the third year and the following years.

The Guardians Council—a watchdog that ensures laws are in line with the Constitution and Sharia—has found several flaws in the bill and sent it back to the parliament for revision.