Domestic Economy

Tax Outweighs Oil for 1st Time in 50 Yrs.

Tax Outweighs Oil  for 1st Time in 50 Yrs.Tax Outweighs Oil  for 1st Time in 50 Yrs.

The Iranian government is earning more from tax receipts than oil revenues for the first time in almost half a century, as the country shifts its traditional reliance on oil income in the face of plummeting oil prices.

President Hassan Rouhani’s economic strategy is to significantly reduce the government’s dependency on oil and instead collect tax more systematically, according to deputy managing director of National Iranian oil Company, Ali Kardar.

“For the first time in 50 years, the government’s share of the oil revenue is less than what it is earning from tax, including VAT,” he told the Guardian on the sidelines of the Second Iran-Europe Forum held in Geneva.

Only around 10% of Iran’s GDP are currently dependent on oil and almost 20% of oil income goes into a sovereign wealth fund, which is reserved for development purposes.

The budget law for the current Iranian year (started March 21) has projected 750,000 billion rials ($25.8 billion) and 130,000 billion rials ($4.48 billion) in tax and customs revenues respectively, while the share of oil income is estimated at 530,000 billion rials ($18.27 billion), said Ali Asgari, head of Iranian National Tax Administration, earlier this year.

This year's projected tax revenues indicate a nominal increase of 30.3% compared to the last fiscal year, in which about 700 trillion rials ($21.2 billion) were collected in tax. Moreover, an increase of 50% in tax revenues was registered last Iranian year compared to the previous year.

Asgari has also been quoted as saying that based on new amendments to the tax law, there has been no increase in the tax base.

"It has been decided that tax evaders face the full force of the law, including criminal charges, fines and prison terms," he said.

"Tax dodgers will also face social exclusion, which means they will be barred from serving on the board of any organization or as members of any association or the parliament."

Taxes played a secondary role in last year’s budget. While oil revenues constituted 35.5% of total revenues, tax revenues only reached 30.2%. This looks set to change in this year’s budget, which is based on oil prices of $70/bbl. The share of taxes will slightly increase to 32.2%, while the share of oil drops to 26.59%.

Iran’s oil revenue took a heavy toll in recent years from the oil embargo imposed on Tehran by the EU and US over its nuclear program and later because of falling global crude prices. Sanctions are expected to be lifted early 2016 as part of the nuclear accord reached between Iran and P5+1 (the US, the UK, France, China, Russia and Germany) on July 14.

Kardar said NIOC would offer a set of new lucrative contracts to foreign investors, worth more than $100 billion, for about 45 potential onshore and offshore fields by November.

“We currently produce 3 million barrels of oil a day, of which 1.3 million are exported but we expect that to increase to 2.3 million in May or June next year,” he said.

Hossein Rasam, the director of Rastah Idealogistics and former Iran adviser to Britain's Foreign and Commonwealth Office, said Tehran has taken important steps in recent years to rectify loopholes and move toward tax revenues rather than rely on oil wealth.

It was not clear, he said, if Iran could maintain the equation, should its crude sales increase or oil prices go up in future.

“Under advice from the International Monetary Fund, Iran began to redefine taxation in the early 1990s, but genuine efforts only started under the reformist president Mohammad Khatami and continued under Mahmoud Ahmadinejad, when VAT was first introduced.” he said.

“Bearing fruit just now, Iran is pursuing tax collection more seriously and putting itself in order to rely more on taxation.”

Years of financial stringency under western sanctions have contributed in forcing Iran to find a way to reduce its reliance on crude.

Rasam said this is a positive development for Iran, for the more tax people pay, the more accountability and responsibility they will demand from the government.