The bearish trend in the last fiscal year that ended on March 20 hurt government tax revenue as share trade dropped substantially.
Unlike the spectacular performance a year before, the government generated 53 trillion rials ($196 million) in taxes last year – down 70% y/y according to data published by the Central Securities Depository of Iran.
In the preceding year, the government reported 179.89 trillion ($670m) in tax on stock trade amid unprecedented boom in the bourse in the first half of the year -- a historic 445% annual growth.
Known as financial transaction tax (FTT), tax on stock is levied on buying and selling stocks, bonds, or other financial contracts like options and derivatives.
Government tax revenue consists of returns from “direct taxation” and “tax on goods and services”. Direct tax includes three groups: “tax on legal entities”, “income tax” and “wealth tax”. Tax on stock trade falls under the last category.
As per rules, tax on stocks is 0.5% of the total value of the trade. This tax is different from capital gains tax commonly levied on share profit. The government has often denied the likelihood of levying capital gains tax on share profit.
Given the deep recession in the share market last year, the tax rate is not expected to increase in the near future because any rise will further harm investment in the already limping bourse.
The steep decline in the government tax revenue from the share market is linked to investor aversion to following the historic collapse in the summer of 2020.
Data released by the Securities and Exchange Organization show slight gain in blue chips while majority of small caps took a big hit last year.
The benchmark of Tehran Stock Exchange, TEDPIX, was up barely 4.5% during the year while the TSE’s equal-weighted index plunged more than 21%.
The former index is highly sensitive to performance of fewer large caps while the latter best reflects small caps, which constitute market majority.
Income from tax on share fell short of the 171.2 trillion rials ($634m) forecast in the budget last year. This compelled the government to cut tax income projections by a massive 40% in fiscal 2022-23 budget.
Tax on shares obviously falls if trade value is low and when market participants stay away for extended periods. Based on this reality, the government projected lower income from stock trade this year, reflecting the bearish trend that has dominated the market for almost two years.
As per the budgetary provisions, the government expects to earn 104.2 trillion rials ($385m) in income from tax on stock trade this year.
The government recently decided to use tax revenue from share trade to invest in the share market in line with broader support measures to revive the bourse.
Accordingly, government income from tax on shares will be wholly injected in the Capital Market Stabilization Fund to help resolve the liquidity crunch.
