The value added tax exemption for food and agricultural imports will be removed as of Jan. 3, 2022, but their supply in the domestic market will remain tax exempt just like their locally-produced counterparts.
According to a directive of the Iranian National Tax Administration 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 will be subject to a 9% value added tax as of Jan. 3, 2022, Tasnim News Agency reported.
These products include unprocessed agricultural commodities, including raw agricultural and horticultural products, medicinal plants, rangeland products, forest products (including lumber), greenhouse crops (vegetables, cucurbits, flowers, plants and mushrooms), seeds, saplings, pesticides and fertilizers, milk, cheese, yogurt, 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.
“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 and unless we have a proper system, it is not possible to enforce VAT in its current form, as 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. 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.
Yazdanpanah 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 the consumers; the low-income individuals will be under more pressure and some key food items may be removed from their shopping list,” he added.
Removal of Import Subsidies
The new measure could inflate the consumer prices of essential goods as they have been eliminated from the list of goods entitled to subsidized imports at the rate of 420,000 rials per dollar in the budget bill the government has submitted to the parliament for the fiscal 2022-23.
This move, which must first be approved by the parliament before it is passed into law, should put a permanent end to the years-long debate on whether or not to end the increasingly costly and corruption-tainted subsidy policy.
The government says it has allocated 1,000 trillion rials ($3.3b) to help compensate the elimination of subsidized foreign currency in the 2022-23 budget.
As per the budget bill recently submitted to parliament by President Ebrahim Raisi, the government will pay the $3.3 billion “to offset price rises of basic goods, pharmaceuticals, bread and guaranteed-purchase of wheat”, local media reported.
Since mid-2018, the government has subsidized currency for importing essential goods ($1=42,000 rials). The highly subsidized rate is less than a seventh of the real prices in the open market and has been fertile ground for rent-seeking by some big import companies, vested interests and state cronies.
Subsidized forex is earned from oil export and used only for importing essential goods, pharmaceuticals and machinery to avoid price hikes in food and raw materials.
While successive Iranian governments have subsidized food imports, cheap currency in its current format was first given after the steep rise in foreign exchange rates in the spring of 2018 soon after the United States abandoned the Iran nuclear deal and imposed tough economic sanctions.
Flaws in the apparently ill-advised policy emerged in the first few months after inception and the government under pressure was compelled to slash the list of goods eligible for subsidized currency.
In the present fiscal budget, the government was not allowed to pay more than $8 billion in subsidized currency for importing food and medicine. The Central Bank of Iran says what has indeed been paid so far is over and above the ceiling set in the budget.
The $3.4 billion will likely be channeled to the low-income strata in the form of cash subsidy.
Prominent economists, academia and socioeconomic experts maintain that the forex subsidy policy never achieved its goal of supporting the downtrodden while greedy middlemen in the distribution chain benefited the most.
On many occasions, consumers of imported essential goods must buy their needs at prices that equal open market forex rates, thanks to the gross mismanagement, inefficient distribution system and absence of viable government oversight.
In short, a significant portion of cheap forex is pocketed by big importers and the distribution chain instead of end customers, which ostensibly means the millions of Iranians at the lower-end of the economic ladder.
It is often said in Tehran’s politico-economic circles that in the past three years, billions in subsidized currency were given to selected companies to import food and medicine, yet some of these companies simply did not bring anything into the country.
It later turned out that some of the firms who took the scarce forex resources were shell companies. Few, if any, have paid for the fraud or faced the full force of the law.
Essential Imports at Full Throttle
More than 17.89 million tons of essential goods were unloaded at Iranian ports during the current Iranian year’s first eight months (March 21-Nov. 21), registering a 32% rise compared with the corresponding period of last year, according to the Ports and Maritime Organization of Iran.
Essential goods, also known as necessity or basic goods, are products consumers will buy, regardless of changes in income levels.
With 3.87 million tons, wheat had the biggest share. The volume was 41% more than in last year’s corresponding period, the news portal of the Ministry of Roads and Urban Development reported.
Other imported essential goods unloaded at Iranian ports during the period included 2.44 million tons of barley, 1.33 million tons of unrefined edible oil and close to 3.56 million tons of soybeans, registering a respective year-on-year growth rate of 143%, 93% and 85%.
Imports of sugar, rice and corn decreased by 20%, 7% and 4% YOY to stand at 853,446 tons, 164,503 tons and 5.67 million tons respectively.
The Government Trading Corporation has imported a record high of 6.2 million tons of essential goods since the beginning of the current Iranian year on March 21, director general of GTC’s Foreign Trade Coordination Department recently said.
“The essential goods were imported through Iran’s southern and northern ports with 294 vessels that also mark a record,” Masoud Raygan was quoted as saying by IRNA.
He added that the import volume is expected to rise to 10 million tons by the yearend on March 20, 2022.
“We imported more than 4.22 million tons of wheat, 1.01 million tons of unrefined [edible] oil, 684,000 tons of unrefined sugar and 252,000 tons of rice during the period. These shipments have already been unloaded at our ports of entry and are currently either stored in warehouses or have been distributed to the market across the country’s 31 provinces,” he said.
GTC, affiliated with the Agriculture Ministry, is the lever for enforcing market controls and maintaining a supply of wheat, rice, cooking oil, sugar and meat for the country’s strategic reserve of essential goods.
