The National Iranian Tax Administration earned 2,510 trillion rials ($9.47 billion) in tax income during the first 10 months of the current fiscal year, according to its deputy head.
“The figure registers a 65% rise compared with last year’s corresponding period,” Mohammad Masihi was also quoted as saying by Fars News Agency.
“Income from VAT stood at 1,000 trillion rials [$3.77 billion] while that of direct taxation amounted to 1,510 trillion rials [$5.69 billion]. A total of 1,925 trillion rials [$7.26 billion] in tax were collected in the last fiscal year [ended March 20, 2021], 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 shutdowns of production units and businesses.
The government is looking to substantially increase its earnings from taxation in the upcoming fiscal year (starting March 21).
It expects to earn 5,270 trillion rials ($19.88 billion) in tax revenues in the next fiscal year (March 2022-23), about twice (95%) the current year’s projections. The target is part of the budget bill President Ebrahim Raisi submitted to 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, advisor to Majlis Research Center (the research arm of the Iranian Parliament), said, “Most optimistic estimates put the volume of annual tax evasion in Iran at 1,000 trillion rials [$3.77 billion],” implying that the volume could be much higher.
He says the tax-to-GDP ratio in Iran currently stands at around 7%, ILNA reported.
This is while neighboring economies register a tax-to-GDP ratio of 12-17%, which 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 tax-to-GDP share among neighboring countries. 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, according to the Persian-language daily Etemad.
Official statistics show that of the 1,390 trillion rials ($5.24 billion) in tax income during the first half of the current year (March 21-June 21), 870 trillion rials ($3.28 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 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 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 quarters. However, fluctuations in the ratio of tax to the government’s overall revenues and GDP remained uninspiring; they can fan the flames of instabilities while 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.
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 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 the fact that almost all economic activities faced restrictions during the first half of the last year (fiscal 2020-21) and consequently witnessed a decline in income.
Tax-to-GDP ratio has 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.
Iran has been wrestling with challenges, including 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.
Experts have time and again called on INTA to abolish the tax exemption of special institutions. 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. However, their supply to the domestic market remains tax exempt just like their locally-produced counterparts, Tasnim News Agency reported.
According to a letter by 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, namely all unprocessed agricultural products including raw agricultural and horticultural products, medicinal plants, rangeland products, forest products (including raw wood), greenhouse crops (vegetables, cucurbits, flowers and plants, 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, 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. 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.
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 said.
