Iran’s Economy Minister Ali Tayebnia says “close to 43% of Iran’s gross domestic product is exempt from taxes.” Recalling an earlier statement by the head of Iranian National Tax Administration (INTA) which put tax evasion at around 20-25% that covers all economic activities, one could fairly claim that more than 60% of economic activities in the country are either conducted off-the-books or exempt from taxation.
Taxes currently account for about 44% of government revenues and 7% of the national GDP. But economic experts believe the present tax regime will not survive for long, and government can and should increase tax earnings to “at least twice the present figure by reforming the tax regime,” the Persian economic weekly Tejarat-e-Farda reported this week.
Over the past years successive governments have talked about, planned, and spent time and energy on ways and means to lessen dependence on oil export revenues and prop up tax revenues as the primary source of income to run the affairs of 80 million Iranians. But easy access to high-powered money coming from the second largest oil and gas reserves in the world seem to have deterred decision and policy makers from pushing this inevitable direction over the past decades.
Thanks to the pattern of declining international oil prices since this past summer, the Rouhani administration was compelled to reduce the oil revenue projection in the budget for the next fiscal year, starting next March. His budget writers put the oil export revenue figure at 33%, down from the 37% in the current year’s budget. This means the government has few options but to raise taxes to meet budgetary needs as is the case in many countries in the world, of course not including the top oil exporting Arab states with a relatively low population.
The global price of Brent crude fell from $115.7 a barrel in June to as low as $57 a barrel over the past several weeks following the decision by the Organization of Petroleum Exporting Countries (OPEC) in its November 27 meeting to maintain its production target. Iran has based next year’s budget on an average oil price of $72 a barrel, down from the $100 which was presumed while drafting the current year’s (ending March 2015) budget.
As part of the economic reforms suggested under the ‘Resistance Economy’ policy -- a set of guidelines of the Leader to lessen the impact of US-led sanctions and stimulate economic growth -- Tayebnia had proposed tax incentives to boost production, expanding the tax base, implementation of a comprehensive income tax system to extend tax coverage to all economic activities, and eliminating the “unnecessary and sometimes discriminatory” tax exemptions.
Long List
So the first and foremost question an impartial observer will ask is which tax-exempt groups the government is contemplating as “unnecessary.” Income tax exemptions/rebates in Iran normally cover a long list of sectors such as agriculture, fisheries, animal husbandry, handmade carpet industry and non-oil exports. The income of rural, tribal and agricultural cooperatives is also 100% tax free. Foreign investors, who establish production lines in Iran and export 30 percent of their products, are also entitled to such exemptions. In addition to this, tax incentives and rebates are available also to other sectors, namely manufacturing, mining, agriculture, exports and investment in special areas.
A member of the INTA Strategic Council, Mohammadreza Yazdizadeh argues that the government policy of offering full or partial tax rebates to particular sectors is not necessarily always effective in achieving the desired results for these sectors.
He notes that tax exemptions in certain organizations or sectors “make the monitoring of their economic activities almost impossible, thus paving the way for abuse and corruption.” Another drawback is that it in fact contributes to an “unfair economic climate that forces private businesses to evade taxes simply to survive and compete with tax-free organizations.”
Some tax-exemption policies do not necessarily serve the government’s declared policies, the INTA official told the journal. “For example, tax exemption on non-oil exports includes export of goods such as coal that the government is unwilling to export and prefers to use domestically as raw material for manufacturing other products. But an all-inclusive tax exemption policy does not allow for selective exclusion of coal or other non-desirable goods from tax-exempt export. “
Yazdizadeh suggests that the government should do away with the unnecessary, unwanted and unhelpful tax-exemptions and rebates and instead use higher tax revenues to offer financial incentives to sectors that are in line with its development plans and policies.
