Economy, Business And Markets

Pain of the Informal Economy

Pain of the Informal EconomyPain of the Informal Economy

E stimates conducted by government organizations suggest that 40% of country’s GDP is exempt from paying taxes. The Financial Tribune looked into the percentage and based on the estimates our experts worked this out to be $16 billion roughly missing from state coffers. There are virtually millions of people who do not pay taxes in Iran and hence operate outside the formal economy. Several types of industries are currently operating out in the open avoiding their share of taxes.

Experts believe that tax evasion, as it stands, is a result of the current business regulations. One of the largest industries, which is to some extent operating outside the legal box, is retail. Retail businesses are considered to be a young industry in Iran so that there are several loopholes within the respective regulations. This may be the reason why some companies in this sector violate the central governments’ regulations.    

The shocking fact is that estimates show almost 70% of the imported products traded in country’s retail system are smuggled goods.  

Pouria, a 36 years old businessman based in Tehran who is already managing a $3 million apparel and fashion retailer business, explained to the Financial Tribune how one can run an informal business, even in the heart of Tehran’s business district.

The process starts in Istanbul, Turkey. Major suppliers of the Iranian apparel and fashion industry are headquartered in Istanbul’s famous shopping district called Osmanbey. The retailers travel to Istanbul during the specified time periods in a year and place their orders based on their needs. Right after finalizing the deal with the supplier everything goes in the capable hands of “joint smuggling ventures.”

These small businesses – which are considered to be a profitable business in the region - consist of Iranian and Turkish individuals who are specialized in delivering products from anywhere inside the Turkish borders to the customers’ door inside Iran avoiding any customs.

The price for smuggling and delivery services is as low as 25 percent including the insurance rates (smugglers insure the customers’ consignment against any damage or detection by the government officials upon the date of arrival inside Iran’s borders.)  

The current government’s failure in confronting the informal economy does not end when the products arrive in the country. However, the government still has the opportunity to stop undocumented goods from being sold in retails system but another issue arises right here, bribery.

Soheil, a branch manager of a popular coffee shop chain says: “If you can manage to pay the right amount to the right person then some regulations may become negligible.”

The good news is that it is not always easy to bribe the officials. During our interview with the business owners, I have realized that for most of them it is not possible to bribe every government agent.

 High Stakes

Many of the interviewees mentioned that it would be easier for them to use the legal procedures but “the problem is that by going through the formal channels, the final price will rise at least 40 percent and as a consequence they would lose the majority of their customers.”

The customs tariff for apparel and textile products currently stands at 100 percent. Experts argue that considering the exchange rates (which have significantly increased over the past 3 years) and the average income in Iran, even prices of “internationally recognized economy-brands” stands very high despite the fact that such goods are imported with zero tax.

Seemingly, those 100 percent tariffs - that double the price of a shirt in Iran comparing to the same shirt in Turkey - is the main reason why business owners are avoiding customs and are taking the risk of smuggling their products through the borders.

Analysts believe that advanced retail industries can accelerate the production of consumer goods. By imposing unreasonably high tax rates on importers of goods, the government is unwittingly excluding itself from a large source of income.

The problems of charging high-tariffs in customs don’t finish there. Another issue rose in recent years due to facilities provided by the Turkish government for Iranian tourists. Apart from the loss of foreign exchange spending by tourists abroad for travel and accommodation expenses – at the time of economic and banking sanctions – they spend a significant amount of money on consumer products from Turkish or the United Arab Emirates retailers. This mismanagement forces a significant amount of opportunity cost on the Iranian economy.

Iranians who travel at least once a year to neighboring countries prefer to do shopping while they are abroad as it is cheaper and more convenient. Amir and Katayoun, a young Iranian couple in Tehran, shared their shopping experiences with the newspaper. “Because of the higher prices and lack of proper services for consumer goods, especially in electric devices or apparel and fashion, we prefer to travel to Dubai or Istanbul once a year to do shopping. Like this we may save up to 25 percent on our overall expenses plus having the joy of visiting a foreign country.”

The government needs to act quicker in adopting changes to the economic environment. In the presented example, by correcting the business regulations and supporting retailers, the administration can increase its tax revenues and help enlarge the profitable shopping base.