Domestic Economy

Structural Changes in New Tax Code

Structural Changes in New Tax CodeStructural Changes in New Tax Code

The government's newly drafted direct taxation code overhauls tax exemptions, adds new taxpayers and is geared toward boosting manufacturing, says the economy minister.

The new code will go into effect at the start of the new Iranian fiscal year on March 20, IRNA reported.

President Hassan Rouhani's government is trying to squeeze out every penny it can from all its income sources. Crude oil is Iran's main export. Its drop to lowest since 2003 this week and the prospect of further declines are forcing the government to minimize inefficiencies. The new tax code is one such attempt at efficiency.

Tax revenues are projected to rise to 1,010 trillion rials ($27.7 billion) in the budget for the upcoming 2016-17 fiscal year—up a lofty 17.3% from the current budget's 861 trillion rials ($23.6 billion).

The increase will come from more efficient taxation by countering tax fraud, streamlining the tax code and getting more people and companies to pay their dues.

"The approach is to avoid awarding unnecessary and inefficient tax breaks and to make the existing ones targeted," said Ali Tayyebnia, who was attending a meeting with private sector representatives.

According to the economy minister, in the new tax code, "manufacturing activities" get new exemptions to boost investment in the real economy and help economic recovery.

"Tax breaks given to many companies have been cut in the new code and, more importantly, even state-owned institutions that were not under government control will become liable for taxation, said Tayyebnia.

Government officials have stated on various occasions that over 60% of the Iranian economy are not being taxed. The figure, however, includes estimates of gray market activities.

As for state-controlled organizations, Tayyebnia said, "Although these organizations were tax exempt, their subsidiary companies were eligible for taxation."

> Other Measures

Another change in the tax code is taxing government and private sector employees at the same rate.

"The goal is to eliminate inequality in taxation," Seyyed Kamel Taqavi, head of Iranian National Tax Administration, said on Saturday.

According to Taqavi, the new law will cut income taxes, such that the top end personal income tax will be cut to 25% from the current 35% while the bottom end will continue to be taxed at 15%.

The new law also reduces income bands in the tax code to three bands instead of the previous five. However, the bands have been widened.

Taxpayers will pay 15% tax up to 600 million rials ($16,300 at market exchange rate) of annual income, up 240 million ($6,500) from the current tax code.

INTA is also offering a one percentage point tax break for every 10% increase in income from the previous year. The tax break is capped at five percentage points. This means income growth will be rewarded.

The move will make it worthwhile for people to pay their taxes, as opposed to evading the taxman. These breaks are also expected to encourage more filings and boost business.