Economy, Domestic Economy

Optimizing Tax System

Optimizing Tax SystemOptimizing Tax System

Taxes are expected to account for 32 percent of the government’s total revenues in the next fiscal year, starting March 20, 2015. Fortunately, in the budget bill proposed to the parliament on Dec. 7, the Rouhani administration has not suggested a hike in tax rates for the next year but has offered plans to fight tax evasion and optimize the current taxation system.

Ali Asqari, head of the Iranian National Tax Administration (INTA), said last week that his organization needs to fundamentally change tax regulations if it is to handle economic developments and meet the goals set in the budget bill. The current tax system is limited when it comes to supervision of legal economic activities. It needs a fundamental reform in order to be able to support the governments’ plans for future, Asqari said at a conference on tax and financial policies held in Tehran.

The Rouhani administration is planning to lessen dependence on oil revenues in the mid run and present a tax system to become the primary source of revenue in the government’s budget. To that end, administration officials have no choice but to reset the basis of the country’s tax system.  

In that regard, the government is expected to remove legal loopholes and end tax breaks granted to certain organizations by introducing two new bills to the parliament: one on value added tax (VAT) and another on monitoring of stores’ cash registers.

However, there are obstacles the Rouhani administration will face if it is to raise tax rates. The first challenge is how to deal with the ensuing public sentiment after doing so. Some still believe that the government does not need to rely on tax revenues while it possesses the second largest oil and gas reserves in the world. They argue that all the government needs to do is to manage the economy efficiently using oil and gas revenues.  

On the other hand, there is another group who are aware of the limits of oil incomes and the importance of tax revenues.  Even this group does not trust the government’s capabilities in managing the tax revenues. As a result, many individuals and organizations try to evade taxes.

Things get particularly complicated when the government decides to tax state-owned enterprises or semi-private organizations. Analysts believe that about 60 percent of the economy is centrally planned, i.e. either owned or managed by the state.

For many years, the Iranian government has had easy access to high-powered money as an “energy superpower.” That has resulted in low productivity of state-owned enterprises fueling the liquidity issue and creating inflationary problems. In such economies, governments tend to budget their unproductive companies by pumping oil money into them – a move that would result in higher inflation. For Iran, that has been the case for the past four decades.

Over the past few decades, state-owned and semi-private organizations have not only been the largest tax evaders, they’ve also refused to pay their water and electricity bills.

But the question is what is really wrong with the tax system as the government is not able to fight tax evasion right under its nose. The answer lies in the existing regulations. Over the past years, companies have managed to lobby lawmakers and as a result many of them are now legally exempt from paying taxes.

Thanks to the turbulences in the oil market, the government has now decided to lessen the share of oil revenues in the annual budget by increasing sustainable incomes such as tax revenues. Minister of Economic Affairs and Finance Ali Tayebnia, promised last week in a conference on taxation and financial policies that his ministry will make fundamental changes in tax system by ratifying new regulations. He added that these changes are aimed at increasing the portion of tax revenues in the state income as well as improving the business environment.  

Over the past year, the Rouhani administration has called for financial discipline within the government as a prerequisite for economic development. The very first step to be taken by the government before achieving the financial discipline would be to fight tax evasion inside its own organizations.