A record high of 2,770 trillion rials ($10.8 billion) in tax revenues were collected over the 11-month period ending Feb. 19, indicating a 60% increase compared with the corresponding period of last year, the head of Iranian National Tax Administration said.
“Direct tax, including tax on legal entities, jobs and wealth tax, stood at 1,670 trillion rials [$6.51 billion], registering an over 56% growth. Tax on goods and services, which includes earnings from value added tax, totaled 1,100 trillion rials [$4.29 billion], showing a 68% increase year-on-year,” Davoud Manzour was also quoted as saying by Fars News Agency.
As per the new approach employed by INTA, whistleblowing on tax evaders and other tax violations would be incentivized. The whistleblowing guidelines were communicated to tax offices on Feb. 27. People can log on to www.intamedia.ir and report tax schemes and evasions, and receive a reward, he added.
A total of 1,925 trillion rials ($7.5 billion) in tax were collected in the last fiscal (March 2020-21), indicating a 37% increase compared with the year before.
Taxation of economic enterprises declined significantly in the fiscal 2020-21 due to the imposition of Covid-19 restrictions and repeated business shutdowns.
The government is looking to substantially increase its earnings from taxation in the next fiscal year (starting March 21).
It expects to earn 5,270 trillion rials ($20.54 billion) in tax revenues in the next fiscal year (March 2022-23) — about twice (95%) the projection of the current year. The target is part of the budget bill President Ebrahim Raisi submitted to the parliament on Dec. 12.
Notably, for the first time, the budget counts on taxing all expensive cars and homes.
Low Tax-to-GDP Ratio
Ahmad Ghaffarzadeh, an advisor of Majlis Research Center (the research arm of the Iranian Parliament), said most optimistic estimates put the annual volume of tax evasion in Iran at 1,000 trillion rials ($3.9 billion), implying that the volume may be much higher.
He noted that the tax-to-GDP ratio in Iran currently stands at around 7%, ILNA reported.
This is while neighboring economies register up to 12-17% in tax-to-GDP ratio; the share increases to 30-35% in developing countries, suggesting that Iran’s economy needs to achieve a 50% surge in this ratio to reach the average rate of tax-to-GDP among neighboring countries. Such an increase will be materialized by setting new tax bases.
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 prevention of tax evasion, according to the Persian-language daily Etemad.
Official statistics show that of the 1,390 trillion rials ($5.42 billion) in tax income during the first half of the current year (March 21-June 21), 870 trillion rials ($3.39 billion) were gained from direct tax and the rest came from tax on goods and services. Just like past years, 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 the 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 year (2021-22) posted the highest tax revenues.
Except for Q2 of 2020-21, which registered a 13.5% decrease in tax income 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 overall revenues and also to GDP remained uninspiring. However, they can fan the flames of instabilities.
Moreover, when a projected income does not materialize, the government will be forced to address the deficits by using other options.
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 income, 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.
Tax-to-GDP ratio has a positive correlation with 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 in Iran is alarming because it is one of the main indicators of economic development. It reflects the real production by an economy and also shows the level of accountability of officials to the public.
According to a report by ILNA, special institutions held 10% of the country’s economy in the month ending Dec. 21, 2019, but their share in tax revenues was insignificant.
9% VAT on Agrifood Imports
The exemption from value added tax on imports of food and agricultural products has been removed as of Jan. 3, 2022, but their supply to the domestic market remains tax exempt just like their locally-produced counterparts, Tasnim News Agency reported.
According to a letter by INTA to the Islamic Republic of Iran Customs Administration, food and agricultural products categorized under sections 1, 3 and 5 of Article A of Value Added Tax Law, namely all unprocessed agricultural products, including raw agricultural and horticultural products, medicinal plants, rangeland and forest products (including raw wood), greenhouse crops (vegetables, cucurbits, flowers, plants and mushrooms), seeds, seedlings, pesticides and fertilizers, milk, cheese, yogurt, poultry eggs, flour and bread, all types of meat and meat products, rice, pulses, soy and soy protein, edible oils (both vegetable oils and animal fats), baby formula, fertilized chicken egg and day-old chickens are subject to a 9% value added tax.
“VAT usually has to be levied at the end of the supply chain, but unfortunately it is now being imposed on every entity in the supply chain,” says Esmaeil Yazdanpanah, a member of Iran Chamber of Commerce, Industries, Mines and Agriculture.
Noting that revenues from import duties should be spent on market and import regulation and production, he added, “The imposition of VAT, in its current form, is putting tremendous pressure on producers. It seems that unless we have a proper system, it is not possible to enforce VAT in its current form; its consequences outweigh its benefits.”
“The government can apply its intended policies on import duties, but they will be problematic as long as we do not execute the VAT system in a transparent context. The systems and organizations [involved in the implementation of value added tax] are not integrated and interconnected. A shared database must be established among the ministries of industries, agriculture and roads. If not, such measures could shock the market and affect it in a negative way,” he was quoted as saying by the Persian daily Jahan-e Sanat.
The official noted that a system must be devised to support low-income deciles both directly and indirectly.
“In the absence of such a system, all pressures would eventually be passed on to consumers and particularly the vulnerable groups. Low-cost items like rice should be imported to provide at least food for these groups. Support packages need to be allocated to low-income deciles first and then such decisions should be made. These policies put direct pressure on consumers, as low-income individuals come under more pressure and remove some key food items from their shopping list,” he said.
