Economy, Domestic Economy

Tax Revenues Take Backseat to Petrodollars, Again

The decline in tax revenues during the first quarter is mainly to blame on the decrease in direct taxes.    The decline in tax revenues during the first quarter is mainly to blame on the decrease in direct taxes.

Oil revenues grew by 333.2% and tax revenues fell by 1.6% in the first quarter of the current Iranian year (March 21-June 21) compared with last year’s corresponding period.

The Central Bank of Iran’s report published on its website added that the government earned 181.9 trillion rials ($4.8 billion) from taxation in Q1, whereas revenues from the sale of oil and petroleum products reached 188.9 trillion rials ($4.97 billion).

The $4.8-billion tax revenues missed the 296.7-trillion-rial ($7.8 billion) target set by the government for the first quarter by a wide margin.

The surprising decline in Q1 tax revenues comes after last year’s promising growth in tax earnings. Iran collected taxes worth 1.015 quadrillion rials ($26.6 billion) in the last fiscal year (March 2016-17), registering a rise of 28.1% compared with the year before. The windfall was perhaps the reason why budget planners set an ambitious target of 1.16 quadrillion rials ($30.52 billion) in tax income by the end of the current Iranian year (March 20, 2018).   

Tax revenues constituted 43% of the overall government revenues for the three-month period, which was 73% year-on-year and 48% in Q1 of the year ending March 2016.

Overall, the government earned 242.3 trillion rials ($6.37 billion) in tax and oil revenues during the first three months of March 2015-16, out of which 142.2 trillion rials ($3.74 billion) were earned from taxation.

The aggregate oil and tax revenues reduced to 228.5 trillion rials ($6.01 billion) due to a decline in the sale of oil and petroleum products, while tax revenues increased to 184.9 trillion rials ($4.86 billion) in the fiscal 2016-17.

CBI figures show sources of government revenues changed in inverse proportion in Q1 of the current year. But why have tax revenues declined?

Tax revenues consist of government earnings from direct and indirect taxation. Direct taxes include three groups of “tax on legal entities”, “income tax” and “wealth tax”. Indirect taxes include “tax on imports” and “tax on goods and services”. The decline in tax revenues during the first quarter is mainly to blame on the decrease in direct taxes. The total volume of indirect taxes rose by 5.3% in Q1 to stand at 88.3 trillion rials ($2.32 billion), whereas revenues from direct taxes reduced by 7.4% to 93.5 trillion rials ($2.46 billion).

Tax revenues from legal entities registered the sharpest decline among all subcategories of direct taxes, decreasing 17.8% compared with the first quarter of last year to hover around 48.7 trillion rials ($1.28 billion). Wealth tax revenues dropped by 0.6% to stand at 5.8 trillion rials ($152.63 million) and income tax revenues increased by 8.7% to stand at 39 trillion rials ($1.02 billion) for the period under review.

The rise in income tax revenues only managed to compensate a part of the decline in tax revenues of legal entities. This comes as the first quarter of last year saw an 18.9% rise in taxes of legal entities compared to the year before. Revenues from taxation of legal entities were expected to reach 93.5 trillion rials ($2.46 billion), of which only 48.7 trillion rials ($1.28 billion) were realized (about 52%). The government managed to materialize 89% of the projected revenues from income tax and 77% from wealth tax.

There are also subcategories in indirect taxes where government revenues reduced in Q1. Taxes on goods and services dropped by 3.3% to stand at 70.3 trillion rials ($1.85 billion) in Q1 compared with the corresponding period of last year. This comes as tax on imports generated 18 trillion rials ($473.68 million) in Q1, registering a 61.8% rise YOY.

  Root Causes

Investigating the reasons behind the decline in tax revenues, Pedram Soltani, the deputy head of Iran Chamber of Commerce, Industries, Mines and Agriculture, told Financial Tribune’s sister publication, the Persian economic weekly Tejarat-e Farda, that the first three months of the current year coincided with the presidential election in Iran, explaining that governments naturally defer taxes and show leniency to highlight the positive features of their performance in the election season.

“Also, major investors, mass buyers and big companies are bound to put their major purchases on hold during election time, which could explain why revenues from value added tax decreased in the three-month period,” he said.

VAT revenues (a subcategory of goods and services taxes) reduced by 4% in Q1 compared with the same period of last year to stand at 48.9 trillion rials ($1.28 billion).  

Soltani noted that the economic stagnation in the fiscal 2015-16 and its impact on businesses might be another reason behind leaner tax revenues in Q1 this year.

“That’s because the official deadline to file tax returns in 2016-17 was July 22. Last year’s tax revenues are set to be realized from this date onward. Generally, what is collected in tax dividends during the first quarter belongs to the tax yields of the two preceding years,” he said.

“Following a decision made by the High Council for Resistance Economy last year, the government agreed with the tax declaration of manufacturing units without investigation. This measure might also have played a role in reducing tax revenues.”

Soltani noted that whenever oil revenues go up, officials go soft on taxation.  

“This leniency is partly positive and recommended at times of recession. However, it may make government resources heavily dependent on oil revenues,” he concluded.

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