Iran’s Economy Suffers From Low Tax-to-GDP Ratio in Q1

EghtesadOnline: The tax-to-GDP ratio stood at 4.2% in the first quarter of the current fiscal year (March 21-June 21), indicating a 2.4% decline compared with the corresponding quarter of last year, Tehran Chamber of Commerce, Industries, Mines and Agriculture reported, citing the Treasury.

News ID: ۷۸۷۲۹۳

14 November 2021

Tax revenue during the first half of the current Iranian year (March 21-Sept. 22) totaled 1,390 trillion rials ($4.87 billion), indicating a 62.5% year-on-year decrease due to the imposition of Covid-19 restrictions and repeated shutdowns, the report added.

Despite the significant rise, the share of tax in the country’s gross domestic product stood at 3.8% and the share of tax in the budget hovered around 31%.

Last fiscal year (March 2020-21), more than 2,070 trillion rials ($7.26) were gained in tax revenues, indicating a deviation of 20.8% from the figure envisioned in the Sixth Five-Year Development Plan (2017-22), the Persian daily Etemad reported.

In Comparison

While the ratio of tax revenue to GDP hardly reaches 6% in Iran, neighboring economies register up to 12-17% while developing countries have a share of 30-35%, suggesting that Iran’s economy needs to achieve a 50% surge in this ratio to reach the regional average. Such an increase will be materialized by setting new tax bases over years.

Therefore, the only way to achieve this goal under the current sanctions regime is by reducing tax exemptions of special institutions, whose former directors now hold posts in the new government, and of course by preventing tax evasion.

Official statistics show that of the 1,390 trillion rials in tax revenue during the first half of the year, 870 trillion rials ($3 billion) were gained from direct tax and the rest came from taxes on goods and services. Like in the past, income from direct tax accounted for the lion’s share of tax revenues. Quarterly trend in tax revenues since the Q1 of fiscal 2019-20 to Q2 of fiscal 2021-22 shows many ebbs and flows: Q1 of fiscal 2019-20 registered the lowest gains from taxation while Q2 of the current fiscal (2021-22) posted the highest tax revenues.

Except for Q2 of 2020-21, which registered a 13.5% decrease in tax revenue compared with the preceding quarter, all other months saw a positive shift (but not necessarily an increase in tax revenues) compared with their previous months.

However, fluctuations in the ratio of tax to the government’s overall revenue and also to GDP remained uninspiring. They can fan the flames of instabilities and tax revenues remain unpredictable. When a projected income does not materialize, the government will be forced to address the deficits by opting for other options.

Taxation Makeup

The report also shows that the shares of direct tax and tax on goods and services in total tax revenues stood at 62.8% and 37.1% in H1. Of the direct tax revenue, 33.1% came from tax on real entities, 25.1% from income tax and 4.6% from inheritance tax. The share of direct tax decreased while the share of tax on goods and services increased in H1 due to the fact that almost all economic activities faced restrictions during the first half of the last fiscal year (March 2020-21) and consequently witnessed a decline in income.

Despite a number of peaks in Covid-19 cases in the early months of the current year, tax revenues increased, which indicate that the current year’s tax revenue is bound to exceed last year’s 2,070 trillion rials.

Tax-GDP Ratio Under Review

The report also said the ratio of tax revenues to GDP was the highest (6.6%) in Q1 of fiscal 2020-21 and the lowest (3.2%) in Q2 of fiscal 2020-21 during the 10 quarters leading to June 21, 2021.

The low ratio of tax to GDP in Iran’s economy is chronic. For example, this ratio dropped to 4.5% in the year ending March 2019 following the reimposition of sanctions, compared with the year ending March 2018 when there was no sign of contagious diseases like Covid-19 and sanctions were less of an issue. The decline in this ratio started in the fiscal 2013-14 but in the fiscal 2016-17, the ratio reached 7.2% and then began a downward trend.

Statistics show that tax-to-GDP ratio was 4.2% in Q1 of the current fiscal year, indicating a 2.4% drop compared with the corresponding quarter of last year. Developed countries report a 35% share of tax in GDP but it becomes more alarming to learn that neighboring countries like Turkey have managed to raise this share to 24% in some years.

Tax-to-GDP ratio has positive correlation with the economic dynamism of the country. Notably, tax revenues are the best way for tackling the budget deficit resulting from the fall in oil revenues.

The method and level of taxation are different in other countries. For years, Iran has been wrestling with challenges, such as tax evasion of high-income groups like doctors and lawyers.

The low ratio of tax to GDP is alarming because it is one of the main indicators of economic development. It reflects the state of production in an economy and also shows the level of public accountability of officials.

Experts have time and again demanded a reduction in tax exemption of special institutions.