The private sector’s confidence in the government improves and tax revenues increase whenever the tax income is spent on improving the welfare of the general public, says Mehrad Ebad, a member of Tehran Chamber of Commerce, Industries, Mines and Agriculture, in an article for the TCCIM website. A translation of the text follows:
Not long ago, the head of Iranian National Tax Administration announced that the share of taxes in the government budget will increase with the reformation of the direct tax law of 2015-16 and the criminalization of tax evasion. Apparently, the government intends to collect more tax by exercising force in three areas, namely “failure to register as taxpayer”, “hiding one’s income” and “registration of unreal expenses”.
INTA also announced that it has achieved remarkable success in three areas of tax evasion, administrative corruption and low tax compliance. However, from the viewpoint of a taxpayer, administrative corruption in the process of tax collection has not been reduced; with the change of auditor, corruption has been transferred from one individual to another and the culture of receiving taxes through an agreement with the taxpayer has become more widespread among auditors. There has been no significant change in the last few decades regarding tax compliance; we have seen the decline of compliance in this field as well.
According to INTA chief, more than 7,000 companies are operating informally, many of the companies have two offices and they don’t consider it wise to have a single office.
Undoubtedly, part of the tax problem is blamed on the culture of paying taxes, the culture of tax collection and the way tax revenues should be spent which areas need improvement.
Fundamental work should be carried out to improve tax compliance. People should be willing to pay taxes; they need to believe that the tax they pay will be used on the development of the country and the improvement of the business environment.
Tax Anomalies
A large number of young entrepreneurs feel that they should avoid paying taxes, that’s why there are so many companies that do not operate officially. Companies and economic players do not activate their economic code until they have to. Many of those who have activated their codes don’t tell the whole truth to the tax office in order to pay less tax. They prefer to spend the equivalent of the set tax to evade tax because they believe that the tax is not being spent on the right issue.
Expert work is needed over a long period of time to fix this problem. It is even vital to promote tax culture at the school level. At the same time, the way taxes are spent should also be reformed. You can’t expect to see tax compliance improve as long as the taxes paid by the private sector are being spent on administrative and current expenses of the public sector.
According to the law, tax should be used to provide welfare and public services, including education, public transportation, energy and sewage management. Instead of seeing an improvement in the quality of these services, these have deteriorated.
The experience of applying strict financial policies in other economies shows that increasing the pressure on companies to collect more taxes has at times destroyed the market, deepened recession and led to the inefficiency of the economy.
I want to remind decision-makers of the Laffer curve that shows the relationship between tax rates and the amount of tax revenue collected by governments. The curve is often used to illustrate the argument that cutting tax rates can result in increased total tax revenue. Government officials need to pay attention to this scientific principle that they should not necessarily expect an increase in tax revenue by increasing the tax rate. Given the lack of mutual trust and the weakening of social capital in Iran, the government’s tax revenues may even decrease.
By looking into economic reforms carried out in developing and neighboring countries, we will understand that when the tax money is spent on improving the welfare of the general public, the private sector’s confidence in the government improves and accordingly tax revenues increase. Then the government was able to finance the whole budget via tax.
Overhauling tax assessment, avoiding the application of subjective methods and trusting tax declarations are recommended. This is the first step in gaining the trust of the private sector even if it leads to a drop in tax revenues in the short run.
However, in the long run, tax revenues will increase once tax coefficients become transparent and lower, the government prepares the ground for expanding tax basis and encourages 7,000 informal companies to submit official tax declarations, in addition to simplifying the complex and non-transparent tax laws.
