Economic experts believe that as the prices of houses, cars, or other assets rise only in line with inflation, there is no real increase in wealth.
“Under inflationary conditions, taxation on capital gains is contrary to the principle of fairness,” they say.
Last week, Iranian lawmakers approved the outlines of capital gains tax that will be levied on profit emanating from the sale of precious metals namely gold, gold ingot, and platinum, foreign currency, real-estate and cars.
“Generally speaking, levying tax on capital gains has a positive relationship with optimal investment. It discourages and reduces investment in unproductive assets and directs part of resources into productive economic sectors,” Ali Sa’dvandi, a macroeconomic policy advisor and finance professional, told the Persian daily Iran.
He noted that when an economy is facing high inflation, the imposition of this type of tax is not fair.
“Imagine a person gaining a profit from buying a residential unit, thanks to the rise in prices. They would be subject to capital gains tax whereas the same person might have suffered losses in another market. Under the circumstances, the enforcement of CGT would give rise to bankruptcies. By and large, such proposals need to be comprehensive, but what has been approved by the parliament is not comprehensive at all,” he said.
“On the other hand, the imposition of CGT could prompt even more capital flight from the country. Those who were investing in real-estate market will prefer to shift to the markets of the UAE and Turkey. To prevent capital flight, foreign exchange rate must be higher than its real value; that requires the termination of the 50-year-long policy of government buying foreign currency to keep the value of the domestic currency high.”
Sa’dvandi admitted that capital gains tax would counter speculative trading, no question about that, but a part of speculative investment benefits the economy.
“The absence of intermediaries in the real-estate market would lead to deeper recession and higher liquidity risks,” he said.
Noting that employing CGT under the current state of Iran’s economy is more complicated than what parliament thinks, the macroeconomic policy advisor said the personal income tax levied on net income (gross income minus allowable tax reliefs) and capital gains of individuals is the main solution to achieve the objectives of the CGT proposal.
The same view toward CGT was expressed by Alireza Taribakhsh, a former official with the Iranian National Tax Administration. He also noted that capital gains tax should be tied to inflation, which is high in Iran.
“When an investor purchases an asset, that asset will gain value over time. When that asset is sold at a higher value in the future, a portion of that growth is due to inflation. When that inflation is ignored in the taxation process, the investor gets taxed on gains that they didn’t make,” he said.
The average goods and services Consumer Price Index in the 12-month period ending May 21, which marks the end of the second Iranian month of the fiscal 2021-22, increased by 41% compared with the corresponding period of the year before, latest data released by the Statistical Center of Iran show.
“Inflation is not a major problem in most countries where CGT has been enforced. They generally have an inflation rate of between 2-3%. But in Iran, inflation needs to be considered as an important factor. What the current initiative will do is taxing the inflation [rather than taxing gains,]” Taribakhsh said.
Mehdi Soltan-Mohammadi, a housing market expert, told the news outlet of Tehran Chamber of Commerce, Industries, Mines and Agriculture that the failure to link capital gains taxes with inflation would encourage the government to keep on implementing inflation-causing policies.
“Why would it dispose of a source of revenue? It might even be motivated to create more inflation,” he said.
“It is the function of a market to match demand and supply through the price mechanism. The country has gone into housing recession and therefore certain policies need to be enforced in order to enhance supply, and not vice versa. All types of taxes pose various risks to investment. Any pressure exerted on supply will drive up prices. At the end, we have no way but to comply with supply and demand mechanism.
The expert stressed that laws should be based on experimental evidence and enforced on a small scale.
“You can’t calm the market by quick interventions or hastily-prepared theories. Such decisions would only give repeated shocks to the market. A policymaker who intends to solve the housing problem needs to think of increasing supply. Without investment, hoping to find a solution to the housing problem is not more than wishful thinking,” Soltan-Mohammadi said.
According to the outlines of the new legislation, capital gains tax at the rate of 40% will apply to profits from the sale of a house held for less than a year. An annual three percentage points will be deducted from profit gained from the sale of a property held for more than a year. A fixed 4% tax rate will be applied to properties held for more than 12 years. Wastelands will also be subject to 40% capital gains tax.
Cars owned for less than a year will be subject to 30% capital gains tax. An annual 10 percentage points will be deducted from the profit gained from the sale of a car held for more than a year. Zero percent tax rate will be applied to cars held for more than four years.
Gold and foreign currency kept for less than a year will be subject to 30% capital gains tax, a 20% tax if held between 1-2 years and a 10% tax will apply to gold and foreign currency held for more than two years.
