Economy, Domestic Economy

Trade: To Tax or Not to Tax

IRICA says the tax will help combat fraud.IRICA says the tax will help combat fraud.

On Monday, the Islamic Republic of Iran Customs Administration surprised the business community by saying it would charge all imports a four percent tax upfront. Members of Iran Chamber of Commerce, Industries, Mines and Agriculture were quick to protest. They complained about the tax’s blow to trade and negative impact on inflation. In their view both the businesses and consumers stand to lose.

Customs had given a wind of the decision before Monday’s announcement. But according to ICCIMA Vice President Pedram Soltani, the tax was to be discussed between the heads of the customs administration, chamber of commerce and the Trade Promotion Organization. The customs  sidetracked them.

The chamber’s reaction was swift. Soltani wrote a letter to Economy Minister Ali Tayyebnia, listing the downsides of the move and asked the minister to overturn the decision. Soltani was not the only chamber member to react. Mozafar Alikhani, the chamber’s technical deputy, was also quick to condemn the decision in his talks with media soon after the announcement.

Perhaps, part of the chamber’s reaction was to dispel rumors that IRICA had acted on the chamber’s behest. Alikhani dismissed the rumor.

In this writer’s humble view, free trade is the elixir of growth. And the government has denied the economy this elixir on a variety of grounds. I was rather embarrassed recently, when I had to tell Australia’s deputy head of mission Tim Peterson, that the Iranian government leveled an average 28% tariff on imports. Australia’s average tariff rate is 2%, half of the tax customs wants to charge. Iran has a long way to the doorsteps of the World Trade Organization.

  Price of Fighting Fraud

The IRICA says the tax will help combat fraud. Many merchants have used fake commercial cards or used permits given to others for importing goods, to evade taxes and tariffs. An upfront tax will tighten the noose around the necks of the fraudsters and their minions.

Reza Ghahremani, Maskan Investment Bank’s head of R&D welcomes the move and says it brings much-needed transparency to commercial cards. “In the 1393 fiscal year we imported $53 billion, and they hardly got a 7% tax from it all.”

But there is a price to pay. As members of the chamber put it, the tax will increase commercial costs and lead to a price increase for imported stuff. Given that Iranian consumers love imported goods, this will erode household incomes. This obviously  is not a fair price to pay for filling government coffers and fighting tax evasion, they contend.

But the tax can also lead to another side effect. If import costs go up, greedy middlemen will have more incentive to smuggle goods across Iran’s vast and porous borders. At over $15 billion last year, contraband already makes up a significant portion of trade. But though trade barriers and high import duties fuel smuggling, should trade policy be dictated by the police’s inability to guard borders?

Many importers have also been exempted from the new levy, including the government and manufacturers. As experience with exemptions in the bureaucracy shows, they are a gateway to corruption. This point was also highlighted by Soltani.

So the question here is what price should be paid to fight tax evasion or even how tax evasion should be fought. Creating barriers to trade should not be the answer to fighting fraud or raising revenues. Measures to fight fraud should be broad, and without loopholes. Commercial cards should be better controlled and checked and borders safeguarded, but trade should flow freely. However it will take time for Iranian politicians to do away with their controlling attitude.