Manufacturers Spared From Upfront Import Tax

T he manufacturing sector is exempt from paying taxes slapped on imports, the Islamic Republic of Iran Customs Administration has clarified in a recent directive published on Monday.
Imports were subjected to a 4% upfront tax based on a regulation in effect since August 23, drawing a barrage of criticism from traders.
However, IRICA said the manufacturers and “creditworthy taxpayers” have not been included in the law from the very start.
“The law is aimed at identifying tax dodgers,” an IRICA source told Financial Tribune on condition of anonymity. “It targets tax evasion and fraud on the part of commercial ID cardholders.”
Commercial ID cards are certificates issued by the Ministry of Industries, Mining and Trade, which identifies the applicants through Iran Chamber of Commerce, Industries, Mines and Agriculture. The cards permit individuals and entities to trade under certain conditions.
Fraudsters have a history of misusing these certificates.
“Our inspections have shown large-scale imports are made under fake identities,” the source said. “Millions of dollars worth of products have been imported with commercial cards belonging to people who don’t have anything to do with trade, such as blue-collar workers, bakers and farmers.”
When the law was enforced, an IRICA statement said “profiteers” rent the cards and doctor records to avoid paying taxes leading to “a loss of revenues for the government and the nation”.
Renting out commercial cards to others is a felony in Iran’s commercial law, the Ministry of Industries, Mining and Trade had previously announced.
ICCIMA Objection
The tax regulation has drawn the criticism of ICCIMA whose members were quick to condemn the decision.
The move was criticized by Mozafar Alikhani, technical deputy at ICCIMA. He said the levy will raise the price of imported goods, thereby increasing inflation and create a drag on household finances.
Alikhani cited the dire condition of manufacturers and importers, and said the move could deepen cash flow shortages.
He also said the tax hike would complicate business procedures and was against a law passed specially to promote local manufacturers.
“The new tax is supposed to stop tax evasion. Tax evaders are few compared to the law-abiding businesses that pay their taxes on time. Thus, it is illogical to add pressure on the decent majority for the sake of wanting to tame the minority,” Alikhani was quoted as saying.
Pedram Soltani, the chamber’s vice president, asked Economy Minister Ali Tayyebnia to revoke the tax hike in an open letter sent on behalf of private enterprises. He wrote that the law already had measures to counter tax evasion with borrowed commercial cards.
Soltani added that two more downsides to those cited by his colleagues about the tax hike.
The tax hike will “raise the cost of legal imports and thus encourage smuggling”, he said, stressing that the customs directive is opaque and its misinterpretation will eventually increase rackets in the bureaucracy.
Manufacturing Tax
Much as the traders are against the new regulation, it grants privileges to manufacturers. However, despite tax relief for retailers and large state entities, the manufacturing sector has been levied tax hikes on several occasions in the past few years.
The government has been pulling the string on taxes, aiming to increase the share of tax revenues in the budget to make up for the falling oil prices.
According to Mohammad Reza Mortazavi, secretary-general of Iran’s House of Industries, Mining and Trade, taxes imposed on manufacturers rose by 23% in the last Iranian year (March 2015-16) compared with the previous year.
Manufacturing taxes also rose by 32% during the fiscal year to March 2014 following two years of consecutive 18% increases.
Domestic industries are grappling with a lingering slowdown. The manufacturing sector has been in a deep recession as a result of sanctions imposed for years on the Iranian economy over Tehran’s nuclear program, among other reasons. The embargoes kept the trade sector in check and blocked access to technologies, machinery and raw materials, increasing costs and reducing demand.
The excessive increase in manufacturing taxes has been a shock to industrialists who are expected to be the beneficiaries of the sanctions relief Iran was granted in exchange for limiting the scope of its nuclear energy program. This was part of a major deal Iran struck with world powers in 2015.
Years of restrictions on Iran’s foreign transactions, which were mostly associated with a plunge in oil price, left the Islamic Republic with a tight budget, forcing the government to reconsider its tax code.
Lack of a comprehensive economic database, widespread tax exemptions, complicated and ambiguous regulations, along with a general failure to uphold the law, are minimizing tax revenues.
The government’s tax revenues in the seven months to October 22 stood at about $10.45 billion, which is 84% of the estimated target, as opposed to last year’s 90%, according to Iran’s National Tax Administration.
About 60% of Iran’s economy do not pay taxes, including 40% that are exempt from tax and the 20% who evade tax payment.
Tax evasion is estimated at 300 trillion rials ($7.5 billion) annually.
The budget bill proposed by the government for the 2017-18 fiscal year projects larger revenues from taxes than oil exports–up to 70% of the overall revenues.
By rolling back tax breaks, the government could, at least in theory, cut its budget deficit, which stood at 430 trillion rials ($10.7 billion) in the first half of the current Iranian year (started March 20, 2016).