Expert Weighs Up Impact of New Tax Proposals on Domestic Markets

EghtesadOnline: Two pieces of news broke in the past couple of weeks concerning taxation.

News ID: ۷۸۵۴۰۰

18 February 2020

First, Omid Ali Parsa, the director of Iranian National Tax Administration, said once the parliament gives its full consent, luxury homes and pricey cars will be subject to wealth tax as per the budget bill for the next fiscal year (March 2020-21), Financial Tribune reported.

Second, the Ministry of Economic Affairs and Finance submitted to the office of first vice president its comprehensive Direct Tax Reform Bill containing new tax measures, namely personal income and capital gains tax.

What effect can these new taxes have on markets? Some experts, including Gholamreza Salami, a senior member of the Iranian Association of Certified Accountants, believe that wealth tax would have little if no impact on markets.

“Wealth tax rate is not high enough to have a significant impact on decisions people make when it comes to making an investment. The rich don’t seem to be dissuaded by extra costs while buying cars or homes," he told the Persian-language weekly Tejarat-e Farda.

“This type of tax, which is quite common in most countries, will have three constructive impacts: It directs us toward economic and social justice, it will help the government tackle a fraction of its budget deficit and finally it will come with low social costs owing to the fact that only the rich are subject to wealth tax.”

In early January, Majlis Joint Commission, a parliamentary body responsible for reviewing the budget bill before its final ratification, approved wealth tax on homes with a value of more than 100 billion rials ($709,219) and cars worth more than 10 billion rials ($70,921).

But in the bill proposed by Economy Ministry, homes valued at more than 50 billion rials ($354,609) and cars worth more than 5 billion rials ($35,460) were taxed.

Salami said the direct tax reform bill, particularly capital gains tax, would have a tangible effect on domestic markets, if enacted. For example, capital gains tax might increase home prices.

As per the direct tax reform bill, those who own a home for less than a year, have to pay 25% of their home-sale profit in taxes. The tax rate on home-sale gains will decrease by 2.5 percentage point each year for homes owned for one year to six years. It will be 10% for homes owned for seven years and more, Khabar Online reported.

Tax on profit accruing on bank accounts is expected to give a new impetus to financial markets under the current constrained conditions.

Salami said Iran is a country with a very high interest and inflation rates, which make it economically unviable for people to keep their money in banks.

“In the Iranian years ending March 2018 and 2019, depositors saw their assets lose two-thirds of their value. Had they converted their rials into foreign currencies or invested in buying gold coins, their capital would have increased threefold. Imagine the psychological impact of the government imposing tax on bank savings of these people. It will encourage them to withdraw their money from banks and invest somewhere else. Such a psychological effect would be less for wealth tax, as few people own luxury homes and cars,” he said.

The expert noted that the only concern about personal income tax is the government’s failure to identify individuals’ real income, which is unnecessary, as most transactions are now conducted by banks and the Central Bank of Iran can put the financial data of people and other entities at the disposal of the Iranian National Tax Administration.

The individual income tax or personal income tax is levied on wages, salaries, dividends, interest and other income earned by a person throughout the year.

Noting that taxation accounts for the greater part of revenues in developed countries, Salami said, “So far, there has been no wealth tax in Iran. Since only the rich are subject to wealth tax, for the time being, this type of taxation is unlikely to urge the middle-class to transfer their capital to forex or gold coin markets. By and large, with new taxes, the government will be able to boost its revenues and reduce speculative practices.”

Salami said the Economy Ministry’s Direct Tax Reform Bill has a long way to go before becoming a law, as it must be first approved by the government and probably the next parliament.