To promote production, customs tariff on manufacturing machines should be lower than the import tariff on the final product, but ironically the Iranian Parliament has acted against this rationality, says Amir Nazemi, former deputy minister of ICT and the head of Iran IT Organization, in an article for the Persian daily Shargh.
A translation of the text follows:
The import of “cheese puffs” is a far cry from the import of “cheese puff production machines”, as the latter could lead to the production of cheese puffs with more or less the same technology as their foreign counterparts, as well as the generation of jobs, profits for the producer and future investment.
In short, the import of production machinery is the first step toward development, but imports of the same product would lead to a decline in competitiveness at the national level.
The logic behind industrial policymaking is almost the same in all countries: encourage production instead of consumption. The tax breaks that the American investor receives for their investment follow the simple logic. In fact, policymakers in different countries try to prioritize production over consumption by offering incentive packages to increase investment.
Even their tax policy prioritizes production. Although this policy varies depending on the macroeconomic preferences, it operates on the same premises in all countries. These incentive policies can be seen in socialist countries in the form of a variety of government interventions.
According to a new article of the Fiscal 2022-23 Budget Law, the import duty of all production, industrial, mining and agricultural machinery and equipment must be charged fully
In free market economies, the tax rate is much higher if a company’s profit is distributed among shareholders rather than the time the same profit is turned into a new investment.
Few countries employ customs tariff policies as a tool to regulate the market, but according to the above-mentioned logic, customs tariff on manufacturing machines should be rationally lower than the import tariff on the final product. In other words, to promote production, the import tariff on cheese puffs should be higher than the import tariff on cheese puff production machines.
It is the tariff difference that creates rationality and “economic feasibility” for production and encourages the producer to make investment. This logic was there in Iran’s industrial policymaking, such as Article 119 of the Customs Affairs Law. But suddenly in the Fiscal 2022-23 Budget Law, the same principle has been sidelined.
According to a new article of the law, the import duty of all production, industrial, mining and agricultural machinery and equipment must be charged fully.
This logic will soon be eliminated by the parliament in cooperation with the Ministry of Industries, Mining and Trade. The Industries Ministry, which should normally be in favor of production, does not even oppose the parliament’s proposal. Their official message is: stop production, promote consumerism.
Not only the customs tariff has been eliminated, a section regarding tax exemption for machinery imports has also been removed. As in the value added tax law, tax exemptions for machinery are related to the rate of customs duty (like Article 42 of this law). Therefore, by removing customs exemption, the producer must pay taxes in addition to the customs tariff.
Overall, you can say that the cost of purchasing machinery imposed by this decision would increase by 13% (9% value added tax and 4% tariff). That would mark a decline in the rationality of production in Iran; the parliament and Industries Ministry have joined hands against production.
However, the consequences of this wrong policy won’t be limited to this. The fact is bank loans (from government funds like the National Development Fund of Iran) help importers purchase most production machinery. As such, the loan often covers 70% and the producer’s contribution accounts for 30% of the total costs (80-20% in underprivileged areas).
A sudden increase in customs duties comes as the producer has received a loan last year, registered his order and the machinery has already been imported. Now the producer is seeing a 15% rise in the expenses; this 15% would translate into a 50% increase (70% in underprivileged areas) in the share of the producer (not the bank). Thus, the producer will receive a punishment package in 2022-23.
This type of decision-making has socio-political and economic consequences. It sends a message that first, the behavior of the government is unpredictable; as it can upset all your calculations overnight, avoid taking risks, no matter how seemingly small. Avoid production, avoid innovation and engage in speculative practices instead.
The second message is that the government does not make decisions based on the right logic; in other words, the government has kissed rationality goodbye. Both these messages are unfortunate and disappointing.
