Parliament Approves Ban on New Tax Reliefs

Members of the Iranian Parliament approved last week a ban on introducing “new” tax exemptions and discounts for the next five years.

The measure was proposed by the government as part of the sixth five-year development plan (2016-21) and aims to reduce reliance on oil by boosting tax revenues.

The move, though the wording “new” would cast doubts and create ambiguities over its consequent implementation–and perhaps gives rise to misinterpretation, infringement and abuse–has had mixed reactions on the part of economists and experts ever since it was passed on Tuesday.

According to the Iranian National Tax Administration, about 60% of Iran’s economic institutions pay no taxes at all while tax evasion amounts to 300 trillion rials ($7.5 billion at market exchange rate).

The budget bill proposed by the government for the 2017-18 fiscal year projects larger revenues from taxes than oil exports–up to 70% of the overall revenues.

According to economist Mehdi Pazouki, by rolling back tax breaks, the government could cut its budget deficit, which stood at about 370 trillion rials ($9.25 billion) in the first half of the current Iranian year (started March 20).

“Unfortunately, Iran is one of the most profligate providers of tax breaks. The country’s tax-to-gross domestic product ratio is around 7.3% whereas the ratio stands at 25% for Turkey, 23% for Malaysia and 50% for Scandinavian countries,” the Persian daily Shahrvand quoted Pazouki as saying.

“Government officials need to come to terms with the fact that any institution that generates income must pay tax, since it is enjoying public services and it should help improve such services by paying its share.”

Seyyed Bahador Ahramian of Tehran Chamber of Commerce, Industries, Mines and Agriculture believes the ban on all tax breaks would help improve economic transparency and business environment.

“Most such tax breaks are granted to public and semi-private companies. The government ban on new tax exemptions can level the playing field for all economic entities,” he said.

Yet, according to Pazouki, the move could hurt producers in deprived areas and increase unemployment.

“A significant fraction of tax discounts are granted to producers in deprived areas,” said Mohammad Moravej Hosseini, a member of Employers Guild Association.

“Autonomous institutions, which have not been paying their taxes, might continue to defy the law even after the complete unraveling of tax reductions. Small businesses in provincial towns will bear the brunt of the ban on tax exemptions.”

In 2013, the parliament passed a bill for promoting “educational justice” based on Article 30 of the Iranian Constitution by improving public school facilities located in deprived and rural areas. The resources were to be gained through taxation of exempt institutions.

The plan didn’t quite pan out and the law was communicated with its main part being left out. With such a record, the parliament motion to claw back the country’s lost tax money seems like a long shot.