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EghtesadOnline: New rules on capital gains tax (CGT) were discussed by tax authorities, lawmakers and economists at a meeting organized by the Economy Ministry on Wednesday.

Outlines of the rules were approved by lawmakers in a bill in late May calling for CGT on profit from the sale of gold, gold ingots, platinum, foreign currency, real-estate and cars.

Voicing reservations about the practicality of the new tax plan, head of the Iranian National Tax Administration Omid-Ali Parsa said referred to the “arduous and complex task of tax collection” under the dire economic conditions.

“So long as there is lack of economic, social and cultural stability in the country overhauling tax rules will not work. Enforcing CGT is no exception,” he was quoted as saying by INTA’s public relations office.   

The move has created controversy among economists, government officials and even lawmakers. Proponents say such rules are necessary to fight speculative trade in the asset markets and curb high inflation.     

‘Taxing Inflation’

Opponents argue that as prices of houses, cars and other assets rise in tandem with inflation, there is no real increase in the wealth of those who own such assests. They stress that it would not be fair to levy tax on capital gains under inflationary conditions.

Echoing the views of opponents, Teymour Rahmani, an economist and associate professor of Tehran University, said that this kind of tax in fact would be “tax on inflation”.

Economic stability in and of itself will obviate the need to impose such taxes, he noted. “Such tax bases will not have any place in the economy if we want to restore economic stability,” Fars News Agency quoted him as saying.  

He rejected CGT as a measure to “deprive people of gaining wealth,” warning that it would indeed encourage capital flight as investors will seek to invest in other countries.

For example, in the case of housing, those wanting to invest in real estate will prefer markets in neighboring countries, namely UAE and Turkey.

According to media reports Iranians have put billions of dollars in the Turkish housing market over the past decade and the trend has continued to the chagrin of authorities in Tehran.  

Rahmani said most investors trade in gold, currency, cars etc. because they see these as safe havens to protect their savings from galloping inflation and the de facto devaluation of the national currency.

Exceptions Unfair  

With the obvious aim of supporting the stock market, lawmakers have exempted earnings from stock trade from the proposed CGT.

Rahmani said excluding stock trade is one of the plentiful flaws of the bill. “Exempting selected assets from CGT is not fair. It should include all assets.”

On why the bourse trade would be excluded, Mohammad-Reza Pour-Ebrahimi, head of the Majlis Economic Commission, said if the proposed law includes share trade it would undermine the liquidity of shares and harm millions of retail investors already hit hard when the stock market bubble burst last summer.

Ehsan Khandouzi, an MP backing the bill, said the legislation is crucial to restore stability to the markets. “What we see now is chaos in the financial markets. Such [CGT] measures should be enforced strictly,” he said, adding that with the asset markets reaching stability tax rates could be adjusted and reduced.  

He rejected criticism about the feasibility of CGT, noting that operationalizing it will pave the way for levying personal income tax (PIT).

“If a country fails to enforce such rules, it will never be able to enforce PIT.”  PIT is a tax levied on the wages, dividends, interest, and other income a person earns in a year.

According to the proposed legislation, capital gains tax at 40% will apply to profit from the sale of homes 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 property held for more than 12 years.

Cars owned for less than a year will be subject to 30% 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 owned for less than a year will be subject to 30% tax, 20% if held between 1-2 years and 10% tax when held for more than two years.

 

CGT Pros