Iran Economy News Iran: Budget Deficit Crisis and Tax Stalemate

Iran: Budget Deficit Crisis and Tax Stalemate

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Budget Deficit Crisis

By Jubin Katiraie

As Iran prepares for the 2020-2021 fiscal year, the administration’s only plan to compensate the budget deficit is to further tax the impoverished segments of the society, creating prospects for more nationwide protests.

Among the Iranian political elite, discussions over the 2020-2021 budget bill remain the main talking point. Regardless of the Iranian president Hassan Rouhani administration having sent next year’s budget bill to the Parliament [Majlis] around a month earlier, but the bill has neither been approved nor disapproved so far. Delay in making decisions well shows that there are major obstacles that made the conduction of this bill impossible.

On the other hand, the people and manufacturers are deeply concerned about the administration’s venues and methods for achieving the minimum incomes. Last November, the sudden rise of the gasoline price was one of the administration’s surprising methods to gain more revenue for easing the endless economic crises.

The Rouhani administration didn’t clarify how it planned to overcome the mind-blowing budget deficit. The Plan and Budget Organization claims it will compensate deficits by resorting to receiving taxes or selling securities.

Tax Collection is the Major Challenge in Offsetting the Budget Deficit

“According to the estimation of the Majlis research center, next year’s budget deficit will be 131 trillion tomans [around $10 billion],” Vatan-e Emruz newspaper published on December 30.

Collecting taxes is the main challenge for the Rouhani administration. This administration planned to receive more than 160-175 trillion tomans to cover its expenditures. However, it is helpful to compare the estimation of tax incomes for the 2019-2020 budget bill with the administration’s estimation for the next year.

The Plan and Budget Organization has envisaged that the administration can gain 142 trillion tomans, but the ultimate figure wasn’t more than 78 trillion tomans. According to a ballpark figure, the governing system should receive taxes from the people, companies, firms, and all institutes that engaged in financial activities twice more than the past year.

Lack of a Valid Database

However, this issue [receiving twice more taxes] wouldn’t be simple. First, the country’s financial apparatus suffers from the lack of a valid, focused database system that enables the monetary departments to have a realistic assessment of the tax affairs.

During the past 40 years, Iranian authorities supposed they won’t need a precision economic scheme due to the huge revenue of oil and gas condensate. However, an economic scheme would play an essential role to lead the governing system to even more revenue.

Lack of a progressive financial system leads officials to estimate and collect taxes in accordance with traditional methods. In this context, no need to be a financial expert to discover the possibility of expanding of corruption, fraud, and nepotism.

However, Iran’s authorities don’t make any effort to rescue the country from this disastrous condition as the first and most beneficence of a corrupt financial system.

“The Tax Affairs Organization should get out from the traditional system of collecting taxes and enter into process center system,” Tejarat-e Farda weekly magazine quoted Arab Mazar, the former director of the Tax Affairs Organization, on January 16.

Earlier, economic expert Vahid Azizi unveiled several methods used by influential executives for tax evasion. “Issuing fake factors, establishing fake firms, setting fake factures and documents, etc. are the different methods for tax evasion. These actions are conducted in various types in various sectors of the country,” Etemad Online website quoted Azizi as saying on November 12.

The Story of Tax Exemptions

Uniquely, Iranian authorities issue reckless exemptions on taxes. The fact is they create a kind of balance among their supporters by using exemptions—that have never seen in other countries in the world.

Indeed, the government contributes privileges among the numerous military, security, and religious institutes affiliated with Khamenei to fasten his authority. In other words, they abuse and plunder the country’s facilities and properties in exchange for doing “whatever it takes” to keep the supreme leader in power!

“Four entities control 60 percent of Iran’s national wealth. They are ‘Execution of Imam Khomeini’s Order,’ ‘Mostazafan Foundation,’ ‘Astan-e Quds Razavi,’ and ‘Khatam al-Anbiya Construction Headquarters.’ None of them has any communication with neither the administration nor the Majlis,” Aftab news website quoted Behzad Nabavi, a “reformist” politician, as saying on September 21. “

The first three entities are under the ‘direct supervision of Ali Khamenei,’ and they are only accountable to him. The fourth entity, Khatam al-Anbiya construction, is also a part of the Revolutionary Guards (IRGC) that the supreme leader appoints [the IRGC] the commander-in-chief,” Nabavi added.

Additionally, authorities are extremely concerned about society’s reaction to raising taxes and compensate the budget deficit at the expense of the outraged people. Particularly, when the society is wrathful against the mismanagement and widespread corruption that only made the poor people poorer and any decision supposed to ignite another round of social upheavals like the November protests.

“in such circumstances, around 30 percent of the total budget is supplied by collecting taxes. This is a very low amount. In addition, the system of tax collection is relatively unjust, and many rich people don’t pay taxes. About half of the added values of the country are exempt from Value Added Tax (VAT). The tax evasion estimates at nearly 75 trillion tomans and the value of other tax exemptions are more than 50 trillion tomans,” Donya-e-Eqtesad published on December 7.

Of course, It is unspecified how much tax exemptions the entities controlled by Khamenei enjoy. The stats of their expenditures and incomes are classified. However, the truth is when these economic giants along with 300,000 wealthy, who count as Khamenei’s inner cycle, are exempted from paying taxes or evade, the administration employs pressures on other segments of the society to compensate for the huge budget deficit. Therefore, as always, the poorest segments are the inevitable victims.

Deprived People and Private Sector Are the Rouhani’s First Target for Receiving Taxes

In November, the Rouhani administration suddenly raised and rationed the gasoline prices in order to offset the deficit. This move provided massive incomes for rulers but prompted the ordinary people even the government supporters to protest.

Subsequently, many people flooded into streets to demonstrate their wrath against the government’s terrible decisions. Immediately, economic grievances turned into political demands for a fundamental change in the political system.

Over two days, the anti-establishment marches in more than 190 cities showed that society won’t bear consequences of the ayatollahs’ disastrous policies anymore. However, the government cruelly responded to the people’s rightful demands and killed at least 1,500 people and detained 12,000 others according to dissidents’ estimations. Notably, this scope of the public crackdown was unprecedented over the 40-year Islamic Republic’s rule and coincided with many international condemnations.

Meanwhile, given the government bankruptcy and the U.S. sanctions that approached the oil sale to zero, the country’s economy has severely been crippled. Unsurprisingly, several experts envisage the Iranian people soon experience hikes in the price of other energy sources like gas. The high price will primarily put pressure on the vast part of the society who are living under the poverty line now and push them into absolute poverty.

The Tax Collection Targets the Private Sector

The Rouhani administration sees the private sector as an appropriate means to compensate for the budget deficit. In this respect, it is beneficial to take a glance at the estimated value of taxes for the private sector in comparison with government-linked and public sectors, as well as independent institutions.

“Taxation of legal entities is assessed at more than 44 trillion tomans in the 2020-2021 budget bill. The private sector should pay 31 trillion tomans of the mentioned amount.

“The government-linked companies should pay 6.942 trillion tomans as taxes. The taxation of government personnel is estimated at 5.788 trillion tomans.

“The taxation of institutions and firms affiliated with “the Islamic Revolution” is merely 16.666 billion tomans [0.01 percent of total incomes].

“Taxation of the Astan-e Quds’ companies and factories is 100,000 tomans alone [around $7.5!].

“Taxation of subsets of the ‘Execution of Imam Khomeini’s Order’ and armed forces is also 100,000 tomans,” IRNA news agency published on December 8.

Method of tax division in the 2020-2021 budget bill
Method of tax division in the 2020-2021 budget bill

The Imbalance Between the Private Sector’s Share of the Economy and the Specified Tax Rate

According to published stats, the private sector consists of 12-20 percent of the total economy of the country. Therefore, it should naturally pay taxes based on its share of the country’s economy, which means a rational relation between the share and amount of taxes.

However, a serious imbalance is found by comparing the tax share of the private sector in the country’s budget and its share in the country’s economy. In such circumstances, the Rouhani administration is raising pressures on this part of the domestic manufacturers.

“The budget of the state-run companies is approximate twice the administration’s public budget. In the last year, the budget of the administration was 400 trillion tomans while the budget of the state-run companies was 800 trillion tomans. Despite this amount of the budget but the state-run companies pay very low taxes,” the head of the Tehran chamber of commerce Massoud Khansari said on January 15.

Share of Manufacturing Sectors from Iran's Economy
Share of Manufacturing Sectors from Iran’s Economy

The deputy of the Tehran chamber of commerce Hossein Salahvarzi also pointed out the tough conditions on the country’s economy. “I daily visit several managers and business owners who criticize the tough days of the Iranian economy.

They believe that the continuation of these conditions may lead the financial firms to shut down… It is possible to find the reasons for the worst days of the country’s economy in the treatment of the government-linked institutes with citizens and firms,” Jahan-e Sanat quoted Salahvarzi as saying on January 15.

The truth is in tandem with tightening the noose of sanctions on the Iranian economy, Rouhani’s administration pursues to compensate for the budget deficit at the expense of ordinary people, particularly the private sector.

However, this is a costly, inevitable venue for authorities that sank the country into more economic crises. On the other hand, the private sector is unable to tolerate more pressures including raising taxes. This matter will shut down more factories and companies, which leads more unemployed workers into the streets.

In conclusion, the government that relies on corruption and plunder has no capacity to change the status quo without a fundamental change among rulers. Since the main decision-maker is the supreme leader, who despite his admission about lacking expert in essential issues entered and enforced his opinion in all fateful topics of the state and nation, the country’s economy won’t be rescued from dire conditions without removing him and his appointees from the power. “Commander-in-chief, resign, resign,” was chanted by protesters a few days earlier.

It also should not be forgotten that the Iranian president and members of parliament are also qualified by Khamenei’s controlled institutes like the Guardian Council. In summary, the whole ruling system is responsible for the disastrous economic conditions and over the past 40 years, the outcome of “reformists” and “principlists” was merely more miseries.

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