Economy, Business And Markets

Gov’t Plans to Double Taxes’ GDP Share

Business & Markets Desk
Gov’t Plans to Double Taxes’ GDP Share
Gov’t Plans to Double Taxes’ GDP Share

Reading about the talk surrounding the new "Comprehensive Taxation Plan", you cannot help but feel the arguments are far out and dated.

The government is overhauling Iran's taxation system, fair enough. Taxes are needed and beneficial to the country.

Taxes are needed to finance fiscal spending and they are one of the main economic tools any government can use to influence business decisions. Who would doubt that? For sure, there are different views on the optimal level of taxation around the world, but no one doubts the necessity of having a proper taxation system.

In Iran, however, things were different. As the first exporter of oil in the Middle East, Iranian governments made money by selling natural resources for over 100 years. This cozy, albeit volatile, source of easy income, dislodged taxes and borrowing from the top of the government's financing options and replaced it with petrodollars.

Meaning, Iranian governments got nearly all the money they needed off selling oil; the rest they print unabashedly. So they didn't need to bother with developing a taxation infrastructure and a government debt market, and they did not.

> As Old as Time

So today, the average Iranian looks at the economic situation and thinks: "Why should I pay taxes when the government will squander it", and they would be right on many counts. And we hear government people emphasizing vehemently that taxes are for the good of everyone.

Some governments have attempted to improve taxation with little success, mainly because succeeding governments did not follow through with the plans. Now, the administration of President Hassan Rouhani is having a go at this. Plummeting crude oil prices have left it with little choice.

But apart from the culture, what needs to be changed by the new law? According to Economy Minister Ali Tayyebnia, to make things right, Iran needs to simplify the tax code, reshuffle tax breaks, create a database of taxpayers and finally give more legal backing to the tax administrator.

Iran's tax code is as old as time, well not really. But, it wears a lot of amendments here and there as layer after layer of regulations have been added to it over the years. Many parts contradict, have loopholes and are hard to understand.

"Regrettably, this law is so complex that even if you show one of the articles to all the licensed auditors here, they will give varied interpretations of it," said Tayyebnia at a conference on the tax code earlier this week.

> Fighting Cheaters

There are also multitudes of tax exemptions and breaks that need revision. Most are relics of a state-run economy, a model Iran is desperate to leave behind.

These exemptions are mostly ill-conceived and are doing more harm than good. They are stealing economic resources away from better performing sectors and, more importantly, they fuel the inferno of corruption.

Also, the government needs a database of who owns what and is making how much. The aforementioned history makes people vary of giving their economic details to the government. The database has to be made from scratch.

It’s a tough job and the government would be doing nothing short of a miracle if it pulls this off properly.

More importantly, the Iranian taxmen need to pack a punch.

"Everywhere around the world, tax evasion and failure to file tax forms are a crime and carry the heaviest punishments. But we are in such circumstances that people in certain positions refuse to pay 3.8 billion rials (about $110,000 at market exchange rate) in taxes," said Tayyebnia.

So the new code is the government's shot at taxation. Its main target is to curb tax evasion—general income tax and many others will decline for the upcoming year.

Through its implementation, the economy minister hopes to double taxation's share of gross domestic product from 6% to 12%.

A 12% share would still be far short of the ratio for comparable countries, which is around 20% of GDP. It will get to almost a quarter of its level in developed countries of around 40% of GDP, according to our sister publication, Donya-e-Eqtesad.

This is a far cry from what it ought to be, but a necessary step forward. That's how growth starts anyway.