Falling oil prices have shattered dreams of a swift economic recovery, despite talks of an impending lifting of sanctions against Iran’s nuclear energy program.
The global economy is losing traction. Billionaire George Soros, who is particularly good on macroeconomic calls, says the situation reminds him of the crisis in 2008.
While sanctions relief will unlock billions of dollars of Iran’s overseas assets in 2016 and, coupled with regulatory reform, will usher in foreign trade and investment, the slowdown will hurt Iran’s recovery. This is forcing change upon the government.
Less petrodollars in the wallet has compelled the administration to implement long overdue changes to the taxation system. It is also making a promise few Iranian governments have kept: credibility. But taxes will still have a long way before becoming the government’s main source of revenue and responsibility.
Still, with oil near 11-year lows, the Iranian National Tax Administration has no way but forward.
With changes to the tax code and a renewed fight against tax evaders, Iranian National Tax Administration says it will raise 750 trillion rials in tax revenues ($20.3 billion at Market exchange rate) for the 2016-17 fiscal year starting March 20. That would put tax revenues around 5% of gross domestic product.
According to INTA’s new chief, 750 trillion rials will constitute 35% of the government’s income.
Seyyed Kamel Taqavinejad has been recently named by the Cabinet to replace Ali Askari as the head of INTA.
New Measures
The dim global outlook means the administration has to source its income from within the country. Thus, it is seeking to boost business productivity and taxation.
Changes to the direct taxation law will cut income taxes to make business more competitive.
According to Taqavinejad, the ceiling of personal income tax will be lowered to 25% from the current 35% while the bottom end will remain at 15%.
The new law also reduces income bands in the tax code to three instead of the previous five. However, the bands have been widened.
With the new law, people 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, IRNA reported.
Furthermore, INTA is 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.
The move will allow for tax breaks and make it worthwhile for people to pay their taxes. Tax breaks are also expected to encourage more filings while boosting business.
The effectiveness of these plans though is under question. Some critics argue that, as usual, the administration is too optimistic with its forecasts and the actual tax income will be less. If they are right, the government will have a larger deficit to cover next year.
According to government spokesperson, Mohammad Baqer Nobakht, the government already expects to face money shortage late in the period.
On the other hand, Deputy Minister of Industries, Mining and Trade Mojtaba Khosrotaj reckons if the Oil Ministry manages to ramp up output by half a million barrels per day, as it has promised, Iran will make under $14 billion from oil sales in the 2016-17 fiscal year.
The government is optimistically assuming oil will hover around $40 per barrel for the period.
Abundant Crude Supply
However, oil is falling fast. Oil fell for a fifth straight day on Friday, losing 10% on the week, and Goldman Sachs said more losses were needed to force producers to cut supplies adequately to balance the glut and bleak demand outlook in the market, Reuters reported.
Futures of global oil benchmark Brent and US West Texas Intermediate crude seesawed through the day, settling slightly lower after stock prices on Wall Street gave up their earlier strength. The two benchmarks hit 12-year lows earlier in the week after China’s stock market crash roiled global markets.
Since the selloff in oil began 18 months ago, traders and investors have wondered how long and deep the slide would go as prices fell from above $100 a barrel to below $40, and looked poised to break below $30 next.
If oil prices remain this low, the Iranian government will have to tighten fiscal spending. Due to piles of toxic debt in the banking system, low consumer demand and the government’s dismal financial state, the Iranian economy could easily dip back into recession as economists fear.
A New 2008
The global world outlook is not helping. Lower global growth will mean lower commodity prices, risk aversion and low investment.
Global markets are facing a crisis and investors need to be very cautious, billionaire George Soros told an economic forum in Sri Lanka on Thursday.
China is struggling to find a new growth model and its currency devaluation is transferring problems to the rest of the world, Soros said in Colombo.
“A return to positive interest rates is a challenge for the developing world,” he said, adding that the current environment has similarities to 2008.
Global currency, stock and commodity markets are under fire in the first week of the new year, with a sinking yuan adding to concern about the strength of China’s economy as it shifts away from investment and manufacturing toward consumption and services.
Almost $2.5 trillion were wiped from the value of global equities this year through Wednesday and losses deepened in Asia on Thursday as a plunge in Chinese equities halted trade for the rest of the day.
