Taxation and financial provision for government expenses through it, in recent years and after the intensification of US sanctions, has become one of the main economic discussions in Iran. Although taxation is an effective measure in developed and developing economies, in the current situation of Iran, it has turned into a solution in the hands of the government to compensate for budget deficits and cover the costs of sanctions (poor governance); and this is happening while a significant portion of this tax is provided from the pockets of low-income and middle-class individuals.

In such conditions, the powers controlling the economy of Iran continue to engage in tax evasion or the relevant laws have exempted them from taxes. This means that the government, in practice, compensates for the inefficiency of economic policies and the imposition of ideological actions in the international arena by seizing the pockets of low-income and middle-class citizens.

The conservative government, since 2019, has imposed more than 20 new taxes and fees on the people by first gaining control of the parliament and then the government, breaking the record for receiving the most taxes from the people compared to previous governments and parliaments. Moreover, the eleventh parliament has come up with new innovations for tax collection and income, from taxing store card machines to generating income from fines for not wearing hijab, which has been turned into a place for exchanging money for the wealthy. Property tax, rent, car tax, card machine tax, bills, money transfers, increased fees and various government service costs, and of course, internet censorship, are among these taxes.

The pressure of insufficient funding for budget items has reached a point where in some cases, disputes over how to spend money on “improper veiling fines” become serious. In this regard, one of the members of parliament has said, “One of the issues that caused the delay in addressing the Hijab and Chastity Bill was that the police wanted to deposit the fines into their own account, but it was eventually decided that they should be deposited into the government treasury for family leisure expenses.”

Increasing provincial taxes on the people is in a situation where the sanctions and the deadlock in the negotiations of the thirteenth government over the JCPOA have made the government unable to pay its employees’ salaries and studies show that Iran’s oil revenues have not been fully realized despite the government’s claims. Therefore, the parliament and the government, in a joint action, pass laws that allow for the compensation of the costs incurred by the sanctions to be compensated through taxes from the people.

The government is headed by a system of Qajar era and taxation.

Some experts have compared the new tax system to the old Qajar financial system. The conditions, which show a significant thirst for expanding income-generating tariffs for the government, regardless of the not-so-favorable state of the economy, are evident. These conditions, like drinking Qajar coffee, are poisonous and deadly for the poor and weak segments of society, but make the wealthy and connected to the ruling body even richer and stronger.

This is happening while in our country, according to the law, institutions such as Astan Quds Razavi, Astan-e Hazrat Masoumeh, Astan-e Shahcheragh, Panzdah-e Khordad Foundation, Foundation of the Oppressed of the Islamic Revolution, Islamic Revolution Housing Foundation, Executive Headquarters of Imam’s Order, Kowsar Economic Organization, Alavi Foundation, and dozens of other organizations and institutions, which together control more than 30% of the country’s economy, are exempt from paying taxes. So far, the conservative parliament, which has been elected with the slogan of “budgetary system reform”, has not taken effective action to reform the tax system in the direction of justice and prevention of discrimination.

In the meantime, what most media outlets refer to as the “aggressive policies” of the thirteenth government, relying on tax resources, crimes, and defining opportunities to receive money from the people, have been intensified in the approved budget of 1402, and the government is obligated to earn 838 trillion tomans from the defined income of 978 trillion tomans. This amount was 527 trillion tomans in the previous year’s budget and 325 trillion tomans in the budget of 1400. As a result, the government has increased its tax revenue in the next year’s budget by 59 percent.

In this way, the government, like last year, has put its greatest focus on generating income from the tax sector. In the budget for 1401, the government had decided that, due to the decrease in oil revenues, 526 trillion tomans of the total 664 trillion tomans of public income would be provided from tax revenues. This amount was at least twice the record of taxes collected in the past 42 years. Therefore, the thirteenth government has chosen the second option of reforming structures, downsizing, and reducing expenses, or collecting more taxes.

In this regard, Mohammad Reza Najafi Manesh, the head of the Tehran Chamber of Commerce Commission, said, “Iran has achieved the first rank in the region in terms of provincial taxes and one of the highest ranks in the world in collecting taxes.” This is while, according to the newspaper Al-Sharq Al-Awsat, the Saudi cabinet, under the leadership of Salman Abdulaziz, recently approved the formation of markets that are 100% exempt from taxes in many of the country’s sea, land, port, and airport entrances.

The latest statistics presented by Davoud Manzour, the head of the Planning and Budget Organization, show that “the government has only been able to obtain 42% of the resources that were supposed to come from the sale of oil.” This is while governments consider sanctions as the main factor in the failure of oil sales and exports; a matter that has caused the government’s oil revenues in the first 4 months of this year to be 58% less than what was predicted, and this does not mean anything other than predicting a large budget deficit at the end of 2023. (1)

Provincial tax for budget deficit compensation

We should expect that in the coming year, if there is no progress in the negotiations of the JCPOA, the oil sanctions against Iran will become even more effective, despite the amazing discounts offered by the thirteenth government to China. Oil sanctions are imposed on Iran in a situation where, according to Bloomberg and Reuters, “Iran’s oil exports to China in the first three months of this year were equivalent to 930,000 barrels per day.” Some sources have told these news agencies that the increase in Iran’s oil exports to China is due to the discounts that the Iranians have offered for these exports. It is said that Iran has given a discount of 12 to 15 dollars for each barrel of oil to the Chinese.

Economists believe that taxes are a sensitive tool of governance and a double-edged sword that requires high government intelligence to be used effectively. The delicate relationship between taxes, democracy, government responsiveness, and economic indicators has been proven. Tax pressure in times of recession and inflation, and in an authoritarian system seeking to replace oil revenues under sanctions, will not yield desirable results. Moreover, the current use of taxation as a replacement for oil revenues is only a means for the government to prove its slogan of circumventing sanctions, at the expense of the people and the weaker classes who were supposed to be supported by the conservative government and parliament.

All of this is happening while the government claims to have been able to implement a mechanism to bypass and render ineffective the sanctions imposed by the United States, and last week, Ayatollah Khamenei also mentioned the sanctions again in a meeting with government officials, saying that it is possible to neutralize them by reducing inflation.

Currently, the government is burdening the people, especially low-income groups, with expenses in order to compensate for budget deficits and boast about “neutralizing sanctions”. On the other hand, economic experts – unlike the leader of the Islamic Republic – believe that sanctions exist and inflation is also present. The increase in inflation puts additional pressure on the pockets and livelihoods of households that have become tools for generating income for the 13th government.

The Institute for Commercial Studies and Research, affiliated with the Ministry of Industry, also warned in a report at the end of this month about the continuation of sanctions and the overall policies of the Islamic Republic, stating that with the continuation of sanctions, there will be a continued decrease in social capital, an increase in uncertainty, and ultimately a capital flight from the country.

This report had also predicted the exchange rate, stating that if current conditions continue, the dollar rate will fluctuate between 55 to 65 thousand Tomans, and in case of any tension or unrest, there will be a surge in the exchange rate. According to this report, consumer inflation rate is estimated to be between 55 to 60 percent and producer inflation rate between 50 to 55 percent. (2)

In this report, the main problem in the economy of Iran has been identified as sanctions and restrictions on financial and monetary transactions. This is followed by a decrease in real income and a decline in household purchasing power, as well as an increase in the poverty line, which is perceived as the most significant problem at the social level. In terms of management and budget, the issue of budget deficit caused by structural problems in the banking system and pension funds has also been mentioned.

Underground economy and tax evasion by the wealthy.

For years, governments in Iran have been unable to overlook the need to reform budgetary processes and rely on oil revenues, as developed countries do, to achieve a “tax-based budget”. For example, an examination of the government’s general budget in recent years shows that the share of taxes in the general budget has only been around 30%; although in the past two years, this proportion has increased to 70%, regardless of the amount achieved.

The examination of the financial situation of governments in Iran shows that the three main sources of government expenses are the income from the sale of oil and its products, tax revenues, and income from the privatization of financial assets such as participation papers. However, studies related to the ratio of tax revenue to gross domestic product in the Iranian economy indicate that this ratio has decreased by three percent compared to 1395 and has reached about 4.5 percent. This ratio is very low compared to developed countries. For example, the share of taxes in gross domestic product in Norway is 55 percent, Germany 45.5 percent, Israel 39 percent, and Japan 36 percent. This ratio is even negligible compared to the average share of taxes in gross national product in developing countries with a rate of 16 percent.

One of the main reasons for the low tax ratio in Iran is “tax evasion”. The Ministry of Economy and Finance also announced in a report published in April 2018: “The volume of Iran’s underground economy in 2017 was estimated at around 5361 trillion rials, which is equivalent to a loss of 400 trillion rials in tax revenue.”

Former head of the Iranian Tax Organization, Omid Ali Parsa, had said about the level of tax evasion: “According to investigations, half of the individuals with billion-toman incomes do not pay any taxes at all.” He added: “Tax exemptions and tax evasion by the wealthy are among the main factors for the low level of tax income in Iran.” But who are the wealthy exempt from taxes and the recipients of hidden subsidies?

The status of the main shareholders of the top 50 successful companies in the Iranian stock market, as well as the evaluation of the status of companies privatized to the private sector in Iran, shows that the main sector of Iran’s economy is in the hands of the government and military institutions such as the Revolutionary Guards.

On the other hand, the decisions of the parliament within the framework of the 1398 budget law also show that institutions and companies affiliated with military forces and the executive command of the Imam’s order are only obligated to pay taxes with the “permission of the leader of the Islamic Republic” and not by law. In other words, the main institutions with high income that are exempt from taxes are those affiliated with the leader of the Islamic Republic.

In this situation, it seems that the main challenge for the government to achieve its desired tax revenue in the annual budget is a part of the governance structure; a part that has not yet reflected any accountability and transparency.

The investigation of the ratio of tax evasion to taxable income between the years 1972 to 1996 shows that the rate of tax evasion has continuously increased from 6.24% in 1972 to 35% in 1996. Research on the factors of tax evasion in Iran indicates that tax evasion is the result of variables such as administrative corruption, quality of governance, inflation, trade liberalization, unemployment rate, income inequality, and income level. (4)

Administrative corruption (such as corruption of tax officials) can be considered as one of the factors that directly affects tax evasion. There is not a day that goes by without news of corruption being published in domestic media. The report of the International Transparency Organization on the level of administrative corruption also indicates that out of 180 countries in the world, Iran ranks 130th.

One of the other factors influencing tax evasion is the lack of good governance in Iran. The World Bank report shows that out of 145 countries in the world, Iran ranks 118th in terms of governance. Good governance leads to an increase in public trust in society. In Iran, due to the lack of a democratic structure, the demands of the people are not taken into consideration, which has led to a decrease in public trust and tax evasion. On the other hand, governments, due to not being accountable to citizens, create laws in the interest of the rulers, which in turn leads to a decrease in public trust and ultimately, tax evasion in Iran.

For example, the parliament has approved within the framework of the 1398 budget law that: “In order to implement the 30th principle of the Constitution, the Astan Quds Razavi and those institutions and economic enterprises under the jurisdiction of the armed forces and the executive headquarters of the Imam’s command (peace be upon him) are required, with the exception of cases where the explicit permission of the Supreme Leader is obtained, to pay their taxes. This means that institutions and enterprises affiliated with the military forces and the executive headquarters of the Imam’s command will only be obligated to pay taxes with the permission of the Supreme Leader of the Islamic Republic, not by law.

Discrimination and tax exemption

In recent years, despite the reforms that have been made in the tax system, tax indicators have not improved and have even decreased in some years. According to most experts, the root of this problem lies in widespread exemptions and effective tax rates.

According to Hashemollah Falahatpisheh, former representative of the parliament, “In the past two years, taxes have increased by 100 percent. In the first year of the Rouhani government, this increase was 60 percent and in the second year, 40 percent; taxes that are mainly paid by the middle class of society.”

This tax increase, coinciding with a period of market recession, has caused some business owners to claim that the government is only focused on reaching a predetermined number in its tax collection method and does not take into account the profitability of economic entities as the basis for determining taxes.

There is also a lot of dissatisfaction among the working class about the imbalance in the way taxes are collected. In recent days, the Integration Commission of the Islamic Consultative Assembly exempted members of university academic staff from the salary ceiling and progressive taxation, which has sparked protests from the working class as an example of the unfairness of the tax collection process.

Workers criticize the government for such decisions and ask, how is it fair for workers who earn below the poverty line to pay taxes, while those who earn more than 10 million tomans have to pay progressive taxes, but the wealthy or university professors are exempt?

Workers’ activists reacted to this decision by considering it as collusion between the representatives of the parliament and the wealthy class. They believe that there is a shared interest between the representatives of the parliament and the government with the affluent and certain groups of wealthy individuals, a coalition that is referred to as the “triple-headed iron rent” by them.

The issue of tax exemptions for economic companies is another one of the most important cases of discrimination that has even been criticized by some officials of the Tax Organization. Mohammad Hadi Sabahian, the head of the Tax Organization, recently revealed that in 1400, only 40 companies benefited from 150 trillion tomans of tax exemptions.

The Subhaniyan requested for the amendment of the tax exemption regulations and stated that one of the flaws of the tax legal system is that companies can benefit from billions of tomans in tax exemptions according to legal regulations, while “all around the world, large companies and those with high financial turnover pay the majority of taxes.” (5)

Apart from the conditions for tax exemption for companies and special industries, there are also institutions and organizations in the Islamic Republic that are under the supervision of the Supreme Leader and have always had ambiguity in terms of taxation. The “Executive Headquarters of Imam’s Order” and the “Holy Shrine of Imam Reza” are two large economic complexes whose financial turnover has led to them being referred to as small governments.

Despite the fact that in 1397 (2018-2019), members of parliament, after several decades, imposed full tax exemption on Astan Quds Razavi, institutions and economic enterprises affiliated with the armed forces and the executive headquarters of Imam’s command, in recent years, accurate and clear information has not been announced regarding the amount of income and taxes collected from these entities, and the reported figures have not been credible for the society and some economists.

The current method of collecting taxes from businesses in Iran has undoubtedly put a double burden on professions, employees, workers, and various segments of society, resulting in some small business owners being discouraged from continuing their economic activities in the past two years.

Summary and Policy Recommendations

In advanced countries, paying taxes is a principle and tax evasion is limited and dealt with. However, in Iran, due to the widespread exemptions and rates, the principle is tax evasion and practically no one pays taxes. This issue applies to both legal and natural persons with high incomes. One of the roots of this problem is the abundance of oil revenues, which has provided the government’s income in recent decades, but today this trend is not sustainable.

From another aspect, it should be noted that the system is only a form of work and its depth is something else that should be paid attention to. Especially in income tax, it should be noted that the sale of each commodity should be the income of another commodity. This is also true in value added tax.

In the world, all efforts are towards ensuring that tax declarations are up-to-date and systematic. In fact, the move towards an intelligent tax system is inevitable. However, in our country, due to the shape of the laws that are passed and the various exemptions, it is necessary to have human intervention and it cannot be entirely left to systems and programs.

In the current business environment of the country, paying taxes is an exception and there is a sense of discrimination that does not allow fair taxation for taxpayers; because if they pay the legal taxes, they will fall behind due to the tax evasion of others. In other words, in the current balance, the taxpayer who evades taxes is the winner and the one who pays taxes is the loser. On the other hand, in the current balance, the auditor who accepts bribes is the winner and the one who acts justly is the loser. This balance needs to be disrupted. The same is true for tax exemptions and everyone is trying to obtain tax exemptions for themselves.

This game needs to change and instead of tax exemptions, tax credits should be considered and its limit should be specified; not the government or parliament exempting a whole sector from taxes with one line of law. If this discrimination does not disappear in the current balance, tax systems alone cannot solve the problem of the tax system. Therefore, the government must identify and eliminate obstacles to establishing a new balance, including social issues. Today, audit-based and tax-based systems based on bargaining are a blessing for most taxpayers, but we must move towards data-based and tax-based systems based on information.

Given the mentioned factors and from an economic and political perspective, it can be concluded that the current problems in Iran are not solely the result of economic factors. Solving these problems solely through economic decisions seems impossible, especially in a situation where the Iranian economy is a state-controlled economy based on corruption.

Notes:

1- Poor record of government oil sales! How much of the oil sales went to the treasury?, Donya-ye Eqtesad newspaper, 24 Mordad 1402.

2- The economic outlook of Iran in 1402, Tomorrow’s Economy Institute, August 1st, 1402.

3- Comparison of the share of tax revenue in Iran and developed countries from Gross Domestic Product, stock market, 8th month of 1401.

4- Underground economy and tax evasion in Iran, Independent Farsi, 26 August 2019.

5- The tax on profits is awaiting approval in the parliament, Panah News Agency, 5 Ordibehesht 1402.