Iran's Taxation System

The tax incomes of the government, according to the statistics released by the Ministry of Finance and Economic Affairs, have had an upward trend, standing at 18,680 billion rials in 1998. This is while, 60 percent of gross domestic product mainly in commerce sector have been exempted from paying taxes and 40 percent of economic activities are being carried out in underground form. At present, 60 percent of the country's tax incomes come from taxes levied on companies, and between 40 and 50 percent of industrial units throughout the country which number 500,000 have no license.

In Iran, the taxation system has been the focal point of attention since the victory of the Islamic Revolution in 1979, but as yet an efficient taxation system has not been enforced in the country and for this reason not only the government has been deprived of a healthy and efficient taxation system, but has also worsened the imbalance in the distribution of incomes in the society.

Since a considerable portion of the government income depends on oil sale and sale of the national wealth which are affected by endogenous factors, the government's national authority to improve the country's economic structure is affected by fluctuations in the prices of oil on international markets. Therefore, it is necessary that the government's income structure be improved by reducing its dependence on oil revenues and relying more on tax revenues. But, receiving more incomes alone cannot do much help in improving the country's economic structure through increasing the government's financial strength.

Experts are of the belief that income generating sources should be the basis for levying taxes so as to guarantee sustainable growth of investments and production in the society. However, little attention has been paid to this key point so far and for this reasons tax evasions are very common among wealthy people and those making casual rich. Despite the fact that the government's tax incomes, according to the accomplishment statistics released by the Ministry of Finance and Economic Affairs had an upward trend last year and rose to 18,680 billion rials in 1998 from 12,608 billion rials in 1996, the Minister of Finance and Economic Affairs Dr. Hussein Namazi announced in an oil industry gathering held in late June 1999: "Presently, 60 percent of the gross domestic product is exempted from paying taxes. No doubt that through an unfair distribution of incomes we cannot have a successful economy or a successful industry in particular."

He said that in order to facilitate industrial activities the taxation law would be revised and a law bill to this effect has been submitted to the government. To this end, he added, the ministries dealing with industries had been asked to offer their experts views in this regard.

He added that the income source plays the key role in the amount of taxes that should be paid whereas in the taxation law and its related amendments there practically exist no difference between incomes obtained from commercial or manufacturing activities.

Referring to the fact that incomes from manufacturing activities are lower than that of commercial activities and pointing to the speedy circulation of financial resources in commercial activities, he said that arrangements should be made to insure that manufacturing related activities pay less taxes than commercial activities.

He proposed that taxes be levied on added value which is common in other countries and is taking more significance every day because adoption of such a measure would serve to increase the government incomes and improve the state of affairs in the country.

He said that in many countries various methods are employed to encourage economic institutes to reinvest, the most common of which is to exempt companies from paying taxes on the profits they set aside for investment.

According to the current laws, the profits allocated to shareholders (either in cash or in the form of re-investment) are subjected to tax calculations. This method should change in favor of increasing investments so as to be employed by companies as an incentive method for accumulation of profits.

The expert, pointing to the table of article 31 of the taxation law, called for separation of individual incomes from company taxes. According to the said table, incomes of individuals and companies are equally subjected to tax payment while individual incomes are much less than that of companies and therefore they cannot have an equal base. For this reason different bases should be used for calculation of the incomes of individuals and companies.

The expert said that in today's economies, stock exchanges play a key role in attracting financial resources and directing them towards economic activities, adding that in countries with high economic ad industrial growth rate, 58 and 24 percent of new investments are made through issuing of bonds. Therefore, in order to protect bonds mechanism, it is necessary that tax exemption for companies whose shares are transacted in the stock exchange be raised from 10 percent to 25 percent and small shareholders (those having less than 0.1 percent of a company shares) be exempted from paying taxes on their dividends (subject to article 131 of the taxation law).

Referring to the information made available on amendment to the taxation law as proposed by the Ministry of Finance and Economic Affairs, Dr. Arman warned that if the amendment is approved and submitted to the parliament, it would pose some dangers to the country's economic structure.

Meanwhile, Minister of Labor and Social Affairs Hussein Kamali proposed in late July that there should be a balance between taxes collected from those involved in manufacturing sector and those involved in non-manufacturing sectors.

Kamali said that receiving equal taxes from manufacturing, commerce and service sectors would discourage investors and employers from being effectively present in the manufacturing system of the country.

He said that investment in trade sector makes more profits due to the frequent circulation of capitals and the manufacturing sector which is facing some problems in this regard can not pay taxes similar to the trade sector. This is certainly detrimental to production and employment in the manufacturing sector, serving to spread poverty, he added.

The inefficiency of the taxation system in Iran is not something hidden from the eyes of the Deputy Minister of Finance and Economic Affairs in charge of tax incomes Dr. Ali Akbar Arab Mazar.

Addressing reporters in early September, Arab Mazar said that lack of knowledge about tax regulations and laws is among the main problems facing the country's taxation system, which in turn has pushed up the cost of tax collection.

Pointing to tax evasions, he said that recent estimates showed that 40 percent of economic activities were being carried out in the underground form and this accounts for the major part of tax evasions.

Dr. Arab Mazar said that formation of a tax collection organization and implementation of a comprehensive tax information plan were among the programs to be implemented by the Ministry of Finance and Economic Affairs. He added that the plan will be implemented during the first three years of the Third Five Year Economic Development Plan.

According to Arab Mazar, levying taxes on value added is among the general policies of the Third Development Plan and to this end the Ministry of Finance and Economic Affairs has been obliged to compile and offer a law bill.

It is to be noted that in the open session of the Islamic Consultative Assembly (parliament) on July 4, 1999, Dr. Hussein Namazi, in response to a question posed by the Member of Parliament from Quchan (Khorassan Province) on measures taken so far to improve the country's taxation system and on the position of Khoms (one fifth Islamic levy on certain qualifying things/amount) in this system, replied: "Amending the taxation law as well as its executive procedure was raised sometimes ago. On January 14, 1999, a law bill on taxes was offered to the government. In fact, this amendment followed several goals including adjustment of prices, consolidating and making more logical taxation bases, encouraging voluntary introduction of incomes, reducing social expenses and easing its complexity, and promoting culture of paying taxes. We hope that the bill will soon be submitted to the parliament."

Elsewhere in his remarks, the minister said that according to the view of the late Imam Khomeini and the Supreme Leader of the Islamic Revolution, Ayatollah Ali Khamenei, Khoms and Zakat (statutory Islamic levy on specified items to be used for Muslims' welfare) are two subjects that have nothing to do with taxes and the Ministry of Finance and Economic Affairs does not intend to interfere in payments that are solely related to seminaries and Maraje Taqlid (supreme ulama that are sources of emulation). He also said that the late Imam believed that these two topics should maintain their independence and should not be dependent on the government.

As a matter of fact, amending the taxation system of the country requires the correction of the attitudes that exist towards the tax issue in both macro and micro sections of the economy. At present, 60 percent of taxes are collected from companies without separating income sources (manufacturing or trade sectors). The industry sector with less profits follows the same tax rates that the commerce sector with higher profits has to follow. Taxes are collected from identified sources such as (individuals and companies) while 40 percent of economic activities are being carried out underground with tax evasions.

According to Masoud Faraji, secretary of the Commerce Ministry's High Supervisory Board for enterprises, between 40 and 50 percent of business units across the country which number 500,000 have no license. Of these units, 150,000 are based in Tehran.

Masoud Karbasian, deputy commerce minister in charge of domestic trade said in May, 1999 that many business units which had no license refuse to pay taxes and they often overcharge customers.

There is no doubt that tax evasions will disarm the government from having proper tax incomes. On the other hand, it is not correct to adopt similar attitudes towards economic institutes which follow commercial or manufacturing activities and have different profits. This reduces the motives for investment in manufacturing sector with an aim of activating economic institutes, at a time when the Iranian economy needs more than ever before a growth in investment in manufacturing sectors.

On the other hand, collection of heavy taxes from foreign companies active in Iran is among the main impediments to foreign investment in the national economy. This issue was raised by the Japanese ambassador to Iran in his meeting with the head of the Chamber of Commerce in early June.

During the meeting, the Japanese ambassador said that the level of taxes levied in Iran is higher than that of other countries and this would not benefit the Iranian economy in the long run, reducing the competition attractions of the Iranian market for foreign investors.

With regards to the aforementioned points, it is necessary that the country's taxation system be revised carefully. It is also necessary to pay attention to tax exemptions for investments in manufacturing sector particularly during the first few years after such domestic and foreign investments come to fruition, and to creation of employment opportunities (by increasing investment) and so on.

At the same time, it is important that data bases be established in the country, tasked with detecting tax evasions (by underground businesses), all aspects of income generation sources in the society be taken into consideration and special economic incentives be offered in order to protect investments in the manufacturing sector and tax exemption be offered to profits from enterprises that will be re-invested.