Tax Evasion Undermining Economic Equality

EghtesadOnline: Visible inequality in income distribution aside, Iran’s economy is saddled with an unfair tax system that has made the realization of economic justice more elusive than ever.

News ID: ۷۸۵۶۴۵

01 October 2020

Due to varieties of tax breaks and holidays, the country has been named “the taxpayer’s paradise,” albeit, for the affluent and their lawyers well-versed in ins and outs of the dysfunctional tax system.

The situation for weaker groups, like fixed-wage earners, is naturally tougher. They must pay their taxes before even seeing the color of their paychecks!

In a rare acknowledgment in October by head of the Iranian National Tax Administration, Omid Ali Parsa, 40% of the economy does not pay tax. In the same vein, Eliyas Hazrati, head of the Majlis Economic Commission, said earlier that 85% of Iran's tax revenues “come from barely 3% of taxpayers”.

Reviewing bank transactions of 300,000 billionaires, Parsa said in a TV interview that more than half the people with income above 10 billion rials per annum have never filed their tax returns.

Add to this the shocking tax evasion in a country that has always suffered under the burden of chronic budget deficits. The Economy Minister Farhad Dejpasand, estimates tax evasion costs the treasury 400 trillion rials ($3 billion) a year.

Lists of businesses that enjoy tax holidays or arrogantly refuse to pay tax are long and the numbers staggering. A report in the news website Tabnak puts tax dodgers into five categories: First, those who involved in foreign trade using the so-called rented commercial cards.

Growing Social Gap

Inequality and bias in tax collection system in tandem with lax rules, which allows bigger space for avaricious tax dodgers, has further deepened the gulf between the haves and have nots in Iran. The gap is visible in the recent Iran Gini index report.

The index was at 0.4093 in the last fiscal year (March 2018-19), indicating that the gap between the rich and the poor increased by 0.0112 points or 2.8% compared to the year before (March 2017-18).

The Gini coefficient ranks income inequality on a scale of zero (no inequality) to one (the maximum inequality). In other words, the closer the number is to one, the more wealth is concentrated in the hands of fewer people, thus the bigger the income disparity.

Because of the way the scale is constructed, a modest difference in the Gini ratio implies a big difference in inequality.

The gap between Gini Index of urban and rural areas increased to 0.345 points last year from the preceding year's 0.234 point. Since the index remained more or less the same for rural areas, it is perceived that changes in urban areas are responsible for the bigger gap.

Revenue from trade in durable items, including real estate and precious metals, is seen to be behind the rise in urban household income, particularly those who fall in the high-income brackets.

With the US sanctions taking a toll on the economy and revenue from the key oil sector, the government is struggling to come up with new means of income to pay its bills.

Taxation is one of the means the government is betting on the upcoming fiscal year. 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), 80% more compared to 2018-19.