Iran Gov't Setting New Stage: Advent of Personal Income Tax

EghtesadOnline: The Ministry of Economic Affairs and Finance will prepare a preliminary draft of personal income tax bill by Jan. 10, a deputy economy minister said.

News ID: ۷۸۵۱۸۴

29 December 2019

“Having capital gains tax and redressing wrongs of tax exemptions at its core, the new bill will offer solutions to the tax system’s current challenges,” Financial Tribune quoted Mohammad Ali Dehqan-Dehnavi as saying.

The individual income tax or personal income tax is levied on wages, dividends, interest and other sources of income a person earns throughout the year, Fars News Agency reported.

Noting that some tax breaks have failed to produce the intended result such as improving investment and economic growth, as well as energizing the economy, the official said, “In the new bill, we intend to introduce time-bound, targeted tax credits. Tax exemptions must not extend forever; some economic sectors need to enjoy tax credits for a couple of years before they can generate a taxable income.”

He added that another objective set for the new bill is to improve the country’s wealth redistribution system.

“There are insignificant revenues like the income tax imposed on the wages of employees of public and private sectors. The point is some high-income business owners don’t pay their share of taxes. Our aim is to impose higher tax rates on big earners and lower rates on low-income individuals,” he said.

Asked whether he accepts the claim that the removal of tax exemptions in the Iranian economy would result in at least 1,000 trillion rials ($7.69 billion) of revenues for the government per year, Dehqan-Dehnavi said, “Imagine the elimination of all tax breaks! Will we gain revenues equal to all tax credits? The answer is no. Some businesses will lose their economic viability once their tax breaks go away. That would also increase the chances of the movement of capital and even disrupt economic growth.”

What has been envisioned in the new bill is the significance of filing one’s tax returns.

“Not all gains will be subject to taxation but all revenues yielded from investment in the stock market to interest on bank savings must be declared in order to enhance economic transparency. I must note that these are all proposals of the Economy Ministry; the government and parliament will implement other changes in the bill,” he added.

A capital gains tax is levied on the profit accrued from the sale of a non-inventory asset. The most common capital gains are realized from the sale of stocks, bonds, precious metals, real estate and property.

Need to Stem Evasions, Exemptions

Amid financial constraints as a result of sanctions restricting Iran's sources of revenues, mainly from oil sales, the government is scrambling to come up with new means of income to finance its budget. Taxation is one of those means the government is betting on in the upcoming fiscal year (to start March 20, 2020).

As per the budget bill President Hassan Rouhani submitted to parliament on Dec. 8, tax earnings have been estimated at 1,982 trillion rials ($15.24 billion) in the year ahead, 80% more compared to the fiscal 2018-19.

Latest data provided by Director of Iranian National Tax Administration Omid Ali Parsa show the government’s tax revenues reached 890 trillion rials ($6.84 billion) during the first eight months of the current Iranian year (started March 21). That’s a 4% rise over same period of last year’s tax earnings, according to data provided by the Central Bank of Iran.

CBI has ceased to publish reports on the government’s tax earnings for months now.

According to Eliyas Hazrati, the head of Majlis Economic Commission, 85% of Iran's tax revenues come from only 3% of taxpayers.

He said there's a gap between Iran's tax revenue of 1,270 trillion rials ($9.76 billion) and current annual expenditures of 3,200 trillion rials ($24.61 billion).

According to INTA chief Omid Ali Parsa, 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, puts the size of tax evasion at 400,000 billion rials ($3.07 billion) annually.

“Up to 800,000 billion rials [$6.15 billion] will return to the government coffers [annually], if the current legislation on tax exemption is reformed and reviewed. I believe the value of tax exemption and tax evasion together is more than 1,000 trillion rials [$7.69 billion],” he said.

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.

Taxes will be levied on products that cause environmental damage in their manufacture or use, an official with INTA said earlier.

Mohammad Masihi added that a 2% tax will be imposed on domestically manufactured paint, coating, primer, tires, tubes, plastic and electronic toys, plastic containers, polyethylene terephthalate and melamine.

Imports of the above-mentioned products will be subject to a 3% tax.

“Locally-produced light bulbs, except for SMD/LED, will be subject to a 3% tax, while a 4% tax will be levied on their imported counterparts," he said.

“A 3% tax will be levied on domestically manufactured computers, audiovisual equipment and cellphones as well as linoleum, cellophane and nylon. Importers of these products will be required to pay a 4% tax."

Environmental tax, also known as green tax, pollution tax or eco-tax, refers to a wide range of legislative charges on businesses and private individuals, aimed at reducing practices that harm the environment.

There are many forms of environmental tax, some of which are aimed at penalizing those who emit harmful chemicals in the air and some of which reward those who employ environmentally-friendly practices.

Green taxes give legislators and policymakers a powerful tool for environmental protection to supplement regulatory strategies. While regulatory mechanisms are used by the government to lessen environmental damage by restricting or banning certain products and activities, green taxes seek to achieve the same goals by awarding economic incentives.

The popularity of this approach to environmental problems has led many European nations to enact green taxes in recent reforms.