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EghtesadOnline: A significant part of the 50% rise in tax income owes to high inflation, which is expected to remain above 40%

The ceiling on tax revenues has increased from 4,540 trillion rials ($11.46 billion) in the current Iranian year’s (March 2021-22) budget to 6,800 trillion rials ($17.17 billion) in the next fiscal year’s, indicating a 50% increase, says the head of Fiscal Planning Center of the Iranian National Tax Administration.

Allaying concerns about a further increase in taxes on businesses and salespeople, Mehdi Movahedi said “there will be no new tax bases or rise in tax rates”, IRIB News reported.

“A significant part of the 50% rise [in tax income] owes to high inflation, which is expected to remain above 40%,” he added.

Stressing that tax rates will remain the same as last year’s, the INTA official said efforts have been made to minimize pressure on production and key economic sectors.

“Tax incomes have a 50% share in funding the government’s expenditure. We plan to maintain this share in the year ahead,” he added.

Movahedi explained that INTA is looking to raise its income by collecting tax arrears and stemming tax evasions.

$7.8b in Tax Income During 8 Months

The government earned more than 3,100 trillion rials ($7.82 billion) from tax in the first eight months of the current Iranian year (March 21-Nov. 21).

From the total tax income, direct taxes stood at 1,940 trillion rials ($4.89 billion), and tax on goods and services at 1,160 trillion rials ($2.92 billion), IRNA reported.

From total direct taxes, tax on legal entities stood at 1,270 trillion rials ($3.2 billion), income tax at 554 trillion rials ($1.39 billion), and capital tax at 114 trillion rials ($287.87 million).

The report noted that Iranian year 2021-22 registered 3,250 trillion rials ($8.2 billion) in income tax. The figure stood at 2,070 trillion rials ($5.22 billion) the year before, it added.

Movahedi said this means that during the eight months, the government earned 95% of income tax during the fiscal 2021-22 and 154% of that in the preceding year”

It is worth noting that the Iranian rial has lost more than 60% of its value against the dollar since the start of last Iranian year. Since the beginning of the fiscal 2020-21 to date, the value of the dollar against the rial has increased by around 160%. All above figures have been converted based on the current exchange rate of about 400,000 rials per dollar.

Inflation should also be taken into account when studying the changes in tax income. The average inflation rate has been around 40% since the fiscal 2020-21.

The Ministry of Economic Affairs and Finance had announced earlier this year new measures taken by the government, including connecting nine million point-of-sale (POS) terminals to the national taxation system and activating another nine million POS terminals.

“As such, the number of taxpayers increased by three million by August 22 … The number of tax declarations submitted to the Iranian National Tax Administration increased from three million to 4.5 million [more than a 50% rise] by July 22,” he said.

The Comprehensive Taxpayers System, which is the main platform for the implementation of the law of shopping terminals, requires all sales and purchases to be registered in the form of electronic invoices.

The government says it aims to increase the share of taxes and reduce the share of oil revenues in the public budget as the income from the sale of natural resources, including oil, gas and mines, is supposed to be spent on the development of the country instead of being injected into the current budget.

In fact, the Budget Law stipulates that social media influencers with more than 500,000 followers who generate income from commercial activities will be subject to income tax.

Economy Minister Ehasan Khandouzi earlier communicated the directive on taxing influencers to the Iranian National Tax Administration.

“For INTA, it is not important whether the owner of the bank account is a dairy seller, a celebrity or an athlete. Artists will be exempt from tax if they earn less than 2,000 million rials [$5,050 per year]. All other celebrities who earn more must be taxed,” Davoud Manzour, the head of INTA, said.

And as per the new approach employed by INTA, whistleblowing on tax evaders and other tax violations will be incentivized. Related guidelines were communicated to tax offices on Feb. 27.

The public has been asked to log on to and report tax schemes and evasions to receive a special reward.

Tax Evasion

Globally, approximately 36-90% of government funding come from taxes. In Iran, however, the contribution is 40%. Iran’s super-rich account for 4 or 5% at best, according to Mohammad Salami, a research associate at the International Institute for Global Strategic Analysis.

Tax evasion is estimated at 1 quadrillion rials ($2.52 billion), of which 50% are direct tax evasion and the rest is due to refusal to pay.

According to Rajab Rahmani, a member of the Majlis Budget Commission, tax evasion equals the budgets of 15 of Iran’s 31 provinces.

Omid Ali Parsa, the former head of INTA, disclosed that half of the country’s billionaires pay no taxes, based on a review of bank transactions of some 300,000 people with annual incomes exceeding 10 billion rials ($25,252), while the other half pay less than what is required.

It has been more than a century since the first tax law was enacted in Iran but only in the last decade has the Islamic Republic begun to utilize taxes more seriously.

Evasion is aided by the fact that government agencies do not provide sufficient information to the tax agency.

Over the years, despite the Islamic Republic’s pledges of economic equity, the super-rich have been able to change some laws to their advantage due to their access to centers of power.

However, many other centers of power, institutions and organizations are also exempt from taxes.

Future Sacrificed for Budget Deficit

The economic team of the government pores into the laws of advanced western European countries in search of new tax bases and then, regardless of the fact that these countries collect taxes in exchange for providing services, says Morteza Afqeh, an economist.

“Basically, tax should be determined vis-à-vis services extended by the government. What does this amount of tax collection mean when the country’s roads are in bad condition, Iranian planes belong to past decades and there are no decent leisure activities and welfare? These taxes have been introduced in an economy hit by sanctions and mismanagement. The government only cares about taxing people while it fails to improve productivity at public offices — note that a large number of economic and industrial organizations are exempt from paying tax — so this type of planning amounts to direct injustice to the people. The likes of this new form of taxation is the violation of people’s rights but unfortunately the authorities do not pay attention to the fact that poverty is the end result of these types of taxes,” he wrote for the Persian newspaper Ta’adol.

He noted that too much taxation hurts small businesses and increases unemployment, adding that when faced with government’s decision-making, people have no choice but to migrate to other countries or turn to non-transparent middlemen economy.

“All these hit the economy hard. But sadly it seems that the government has turned a deaf ear to the warnings of economic players. The government does not improve the business environment or try to make its institution smaller or increase the efficiency of public offices or fight the rampant corruption of government companies. People are the ones who have to carry the burden of all these failures," he said.

Prerequisites for Creating Tax Compliance

Tax-exempt status of some institutions should be canceled, sanctions should be lifted, the business environment should improve and most importantly, decent cultural, recreational and welfare services need to be provided in exchange for collecting taxes, said Ali Mazyaki, professor of economics at Allameh Tabatabai’ University, in an article for Ta’adol.

Following the announcement of the government’s decision to tax bank accounts that have more than 100 transactions or 350 million rials (about $883) turnover per month, a wide range of criticisms, analyzes and evaluations were made regarding the different aspects of the issue, he added.

Mazyaki noted that the government justifies this measure based on the assumption that it has a widening budget deficit under sanctions regime and therefore it is unable to pay its bills such as employee remuneration, cash subsidies and capital expenditure budget.

“The government believes it has the right to use any capacity to tackle budget deficit but people who are going to bear this tax burden [and other taxes] have a different logic; people didn’t ask for sanctions or lack of efficiency of government or the unreasonable size of the government or the rampant corruption and the mismanagement in the country,” he said.

“They wonder why they should carry the burden of the government’s mismanagement. After all, the first step in reducing the budget deficit and meeting the spending needs is to shrink the government and increase productivity in various sectors. But not only has the government failed to take a step toward these goals, it has recently sought to enlarge the government through the separation of ministries.”

Noting that this unproductive structure naturally requires more money, the economist said by increasing taxes, the government intends to offset the costs of sanctions, Covid-19 pandemic, lack of productivity, the size of the government, corruption and mismanagement from the people’s pockets.

“Therefore, people will oppose this form of injustice. Notably, all economies that raise taxes provide services for the people in exchange: services in transportation, health, recreation, etc. Such an approach has never been taken in Iran’s economy; people do not know what these taxes will be used for. Why should people pay for government employees and certain cultural institutions which are redundant and unproductive?”

Such a trend directs public mentality to non-transparent economic sectors and also accelerates capital flight,” he said.

“Tax has various types around the world, including wealth tax and value added tax. They are based on a transparent system; people know what added value the payment of one dollar or one euro in tax generates. Iran’s taxation system, however, lacks such transparency and it is not clear where the tax money goes. People only vaguely know that there is a budget deficit and the expenses should be paid.”

Mazyaki stressed that it is very difficult to build a culture in which people accept this “general payment norm”.

“Even in many European countries, people resent the burden of taxes. It is only in the United States that such a norm has been internalized and tax avoidance pricks people’s conscience. Great efforts should be put in to normalize this behavior among the Iranian people. But before that, needed transparency should be created in the economy. Tax-exempt status of some institutions should be canceled, sanctions should be lifted, business environments should be improved, and most importantly, suitable cultural, recreation and welfare services should be introduced in exchange for collecting taxes,” he said.

Loopholes in Taxation System

According to Mehrad Ebad, a member of Tehran Chamber of Commerce, Industries, Mines and Agriculture, the government seeks to collect more tax by exercising force in three areas, including “failure to register as a taxpayer”, “hiding one’s income” and “registration of unreal expenses”.

“INTA announced that it has achieved remarkable success in three areas of tax evasion, administrative corruption and low tax compliance. However, from the point of view of a taxpayer, administrative corruption in the process of tax collection has not been reduced; with the change of auditor, corruption has been transferred from one individual to another individual and the culture of receiving taxes through an agreement with the taxpayer has become more widespread among auditors. There has been no significant change in the last few decades regarding tax compliance; we have seen the decline of compliance in this field as well. According to INTA, more than 7,000 companies are operating informally; many of the companies have two offices, and they don’t consider it wise to have a single office,” he wrote for TCCIM.

Part of the problem, he added, is blamed on the culture of paying taxes, the culture of the tax collecting and the way tax revenues should be spent are three areas that need improvement.

“Fundamental work should be carried out to improve tax compliance. People should be willing to pay taxes; they need to come to believe that the tax they pay will be used on the development of the country and the improvement of business environment. A large number of young entrepreneurs feel that they should avoid paying taxes as much as possible, that’s why there are so many companies that do not operate officially. Companies and economic players do not activate their economic code until they have to,” he said.

“Many of those who have activated their codes don’t tell the whole truth to the tax office in order to pay less tax. They prefer to spend the equivalent of the set tax to evade tax because they believe that the tax is not being spent on the right issue. There is a need for expert work over a long period of time to fix this problem. It is even vital to promote tax culture at the school level. At the same time, reforming the way taxes are spent should also be pursued. You can’t expect to see tax compliance improve as long as the taxes paid by the private sector are being spent on administrative and current expenses of the public sector.”

According to the law, Ebad noted, tax should be used to provide welfare and public services, including the education system, public transportation and energy and sewage management.

“This comes as the quality of these services has not improved over time; it has rather deteriorated. The experience of applying strict financial policies in other economies shows that increasing the pressure on companies to receive more taxes has at times destroyed the market and deepened recession and led to the inefficiency of the economy,” he said.

He referred to Laffer curve, which shows the relationship between tax rates and the amount of tax revenue collected by governments, and noted that the curve is often used to illustrate the argument that cutting tax rates can result in increased total tax revenue.

“Government officials need to pay attention to this scientific principle that they should not necessarily expect an increase in tax revenue by increasing the tax rate. Even, given the lack of mutual trust and the weakening of social capital in Iran, the government’s tax revenues may even decrease. By looking into the economic reforms carried out in developing, neighboring countries, we will understand that when the tax money is spent on improving the welfare of the general public, the private sector confidence in the government improved and accordingly tax revenues increased. Then the government was able to finance the whole budget via tax.”

Ebad recommended overhauling tax assessment, avoiding the application of subjective methods and trusting tax declarations.

“This is the first step in gaining the trust of the private sector even if it leads to a drop in tax revenues in the short term. However, in the long term, tax revenues will increase once tax coefficients get transparent and low, and the government prepares the ground for expanding tax basis and encourages 7,000 informal companies to submit official tax declarations. On the other hand, the complex and non-transparent tax laws should be simplified and tax coefficients need to become transparent,” he concluded.

Budget Inflation Tax Tax Income