Analysis of taxes in budget of year 1400 and proposing corrective suggestions

Project


: Tehran Chamber of Commerce, Industries, Mines and Agriculture

Analysis of taxes in budget of year 1400 and proposing corrective suggestions
Budget numbers are considered evaluations of revenue and expenditure of government in every year. Truly, the figures are not definitive numbers, because they are related to income and expenses, which might alter critically during that year, depending upon dissimilar procedures.
However, the budget charts, as well as clauses and notes of the annual budget, outline the governmental macroeconomic strategy for following year; therefore, they are very vital.
Among budget diagrams, the operating balance sheet is of great importance, because the sheet determines the revenues and spendings of the government based on its economic processes.
A negative operating balance of the government translates into that the present incomes of the government from taxes and so on, which cannot meet its expenses and must be afforded in another way.
In such a circumstance, the government tries to find other ways to finance extra expenditures through the sale of oil and the transmission of its profits to the treasury, or the sale of stocks of state-owned firms, or the issuance of participation bonds, and or even the usage of resources of the central bank, which leads to inflation.
According to the operating budget chart of year 1400 (March 21, 2021 to March 20, 2022), approximately 320 trillion tomans income was predicted, which can only cover around half of the 640 trillion tomans budget of the government; consequently, there is an operating balance deficit of about 320 trillion tomans in the budget law of that year, which has increased by more than 100% in comparison with the previous year.
The government's operating balance deficit is covered by delivering of capital and financial assets. Production and export of oil are the major asset of the government, and for many consecutive years, oil sale has helped cover a percentage of its operating balance deficit.
Although, oil sale covers operating budget deficit, it creates several evil effects on Iran's economy, also known as the Dutch disease.
The issuance of participation bonds and presenting shares of state-owned companies on the stock exchange are other two financial alternatives by the government to cover the operating budget deficit. As crude oil exports have faced bumps in recent years, oil revenues have been partially replaced by such incomes.
However, the sale of capital and financial assets could not offset the budget deficit of the government, and the country’s administration has suffered from a budget deficit unprecedented in more than 50 years.
Even though the budget deficit has experienced several ups and downs in various years; the resources of the central bank have continuously been utilized to cover the deficit, ending up in inflation.
Obviously, the first part of the text explains how the operating balance deficit of the government is not merely budget deficit figures, but other hidden deficit sources have been created during each year that are not even mentioned in the budget law, and their negative impacts are affecting the resources of the central bank.
As stated by economic experts, the structural budget deficit of the government is one of the focal problems of Iran's economy and it is impossible to solve the country's economic woes and challenges without fixing this problem; so, balance of the governmental budget is the first step to guarantee actual productive and sustainable growth.
Efforts to balance the governmental budget deficit translates into the process that spendings will decline if government incomes are stable, and governmental (operating) revenues will upsurge somehow if outflows are unchanging.
The proper method to reform Iran's budget is perhaps a hybrid way wherein the government’s expenditure is to some extent controlled and its income grows through other means.
The existing report addresses the issue of taxation and provisions of the year 1400 budget law. The articles and notes of the law concerning to tax collection process are referred in attachment and their points are mentioned below the expertise opinions.
Furthermore, the report talks about the capacity of tax collection in the country and replies to the question on whether the condition of tax collection from firms and legal persons is ideal or not.
According to estimates made by the report, as many as about 50 percent of the commodities and services envisaged by the law are not subject to VAT, or tax collection from these items seems meaningless due to repressive pricing policies and very low nominal prices.
Thus, approximately half of Iran's economy, while exploiting all of the country's infrastructure and even using more than the governmental sector, does not pay VAT and definitely other sorts of taxes.
The country's economy is divided into official and unofficial sectors. Certainly, several lawful and certified activities are also accounted as informal when it comes to the tax collection.
The duty of the informal sector is clear, while the formal sector of Iran’s economy is inappropriately divided into diverse categories. A group of businesses and large firms that are subdivisions of the Islamic Revolution’s organizations or are among holy places, enjoy different tax advantages and collection of tax from these entities faces numerous complexities.
Aside from such entities, Iran's tax laws such as many developing countries are asymmetric in favor of individuals and also in favor of small corporations. The asymmetric phenomenon harms business motivation for economic actors and leads them to enter the informal sector, which is itself a strong hindrance in the way of economic growth and development in Iran.
Iran’s legal entities are under severe tax pressure and it can be confidently mentioned that their equilibrium point exceeds the maximum point of the Laffer curve.
Arthur LaFerre drew a diagram on a handkerchief in 1974. Following raise of the tax rate from zero percent, the government's tax income increases, but as a result of the increase of the tax rate from one point onwards, economic actors reduce the production and supply of their products to such an extent that in spite of the higher tax rate, the government’s tax income shrinks.
In his works, Ibn Khaldun, a Muslim scholar of the 8th century AH, referred to the fact in another method. He wrote that at the beginning of dynasties, small tax duties generate significant income for governments, but a look at the end of dynasties, in spite of large duties, governments receive little income.
Even though the nominal tax rate for legal entities in Iran stands at 25 percent, which is not a significant figure in comparison with numerous developed states, the stringent measures imposed by the Iranian tax system have led to the increase of tax rate of countless businesses in practice and imposed high administrative and managerial costs on the economic enterprises. A few hardships have been mentioned in interviews with the owners of certain firms.
In conclusion, following highlighting certain issues and woes of Iran's tax system, the report provides solutions to get out of the existing circumstances that can both increase government’s tax income, and decrease pressures on the formal and transparent sector of the economy and therefore, the suggestions can help speed up the country's economic growth and prosperity.
The enactment of the tax law on the total incomes of individuals is one of the vital efforts that can end up in numerous positive socio-economic impacts for the state, which can help increase the government's tax basis and drop the budget deficit as well.