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Maliyat
journal (Iranian Tax Review)
No. 38, summer 2005
IN THE NAME
OF ALLAH
FROM THE PRESIDENT
We would like to begin this issue of the journal with the subject of new
amendments that are going to be effected in the tax law. The need for the
amendment has been emphasized by the law of the fourth development plan with
the aim of achieving two specific purposes. First, to raise
the level of tax revenue, so that it would become a substitute for oil revenue
in financing the government's current expenditures. Second, the
amendment should be based on tax policies aiming at redistribution of income,
in order that social justice and stability and alleviation of economic and
social inequity could be achieved.
Based on those general directives, tax administration has announced some
detailed objectives that would support the realization of the aforesaid goals.
These detailed objectives include, inter alia, the
introduction of new tax sources, more efficient ways of assessment of
taxpayers' actual income, providing incentives for voluntary compliance of
taxpayers, reducing the causes and cases of tax evasion, elimination of
unnecessary tax exemptions, simplification of tax regulations, more effective
prosecution of tax offenders and the like.
Those rulings and directives will, in all probability, be taken into account
in the new amendment. Beside that, we would offer certain issues and
considerations in this regard and hope that they would also draw attention of
the authorities embarking on this significant measure. Our main suggestion
relates to a subject that demands foresight and ability to go along with future
developments. What we have in mind is the domain of electronic commerce; a
phenomenon that is expanding with an unprecedented speed as a result of
continuous progress of electronics and information technology.
Repercussions of e-commerce on taxation capacity of developed countries
have already raised concern of their governments and made them come together to
fine solutions for challenges of new circumstances. The issue has not become so
serious for our country so far, but it would, no doubt, become so in the future
and we ought to have real preparedness for meeting similar challenges in due
time. One of the elements of such preparedness is the study of legal aspects of
the electronic commerce. Since the tax law is going to be amended in the near
future, this specific subject should also be taken into consideration while
deciding on the new amendment.
The next matter concerns the cases of discord among some parts of the tax
law. For instance, there are cases where an article of the law refers to a
ruling supposed to be included in another article, while the latter article is
wholly deleted or changed in a way that is incompatible with the intention of
the former one. The same is true in case of carelessness shown in composition
of phrases and words of the law that may lead to illogical conclusions. Since the tax administration has in mind to
simplify the tax law and remove the possibility of contradicting interpretations,
such kinds of discord among various parts of the law should also be taken into
account and rectified accordingly.
The matters referred to above have also been dealt with by this journal.
Certain articles in this, and also in previous, issue are devoted to the same
purpose; a task that will continue in the future as well.
Dr. Aliakbar Arabmazar
****************
Tax Regulations of the Budget Law
By Mohammad Tavakkol
Iranian budget law of the
year 1384 (21 March 2005 – 20 March 2006) passed the parliament and was
published in the Official Gazette. The budget amounts to an unprecedented
figure of 1.590 quadrillion Rials (one
As far as tax provisions
of the budget are concerned, it seems suitable to examine not only the
regulations that were finally included in the law, but also those that were
disapproved of by the parliament.
A. Approved provisions
In this group the most
important ones are as follows:
1) More tax burden on
state-owned corporations
Some public sector
corporations (including banks) that are supposed to be profitable are listed in
attachment No. 2 of the budget (with certain amounts of net profits and
applicable taxes attributed to them.) Now, paragraphs "d" and
"e" of the Note 1 of the budget law have obligated the said
corporations to make the following payments during the budget year:
a) Income tax of their
operations during the preceding year (Iranian year 1383). This is a normal
payment which all taxable companies have to make according o the relevant
regulations of the tax law, but the companies in question have to bear,
according to the budget law, the following additional burdens as well:
b) income tax applicable
to their current year operations, as estimated in relevant part of the budget.
This estimated tax is to be paid in 12 monthly installments (till the final
settlement in next year).
c) an additional tax
equal to 30% of net income of the preceding year (1383) as declared by taxpayers.
2.
Higher gasoline tax
Rate
of tax on gasoline has been raised from 20% to 30% for the budget year. Base of
tax is consumption price of gasoline (paragraph "g" of the Note 1).
3.
Budgetary support for Customs Department
Paragraph
"h" of note 1 of the budget law has allocated funds with a view to
improve capabilities and resources of this revenue collecting organization. The
funds are to be spent for purposes such as education, giving incentive for
better performance, equipping remote offices of the department with electronic
and other modern facilities, encouraging employees to work in deprived regions,
and the like.
B. Disapproved provisions
The
following tax regulations of the draft of the budget law faced objections in
the parliament:
1.
Higher tax rates for transfer of real property and good will
According
to the article 59 of the Direct Taxes Act, transfer of real property and good
will is subject to taxation at rates of 5% and 2% respectively. It had been
suggested in the draft of budget law (paragraph "l" of the note 1) to
increase those rates to 6% in case of real property and 4% with regard to good
will. Though the proposal had to be effected only for one year, it was
rejected.
2.
Tax rate increase in case of transfer of companies' shares
According
to article 143 of the Direct Taxes Act, each transfer of companies' shares
through the stock market is taxable at flat rate of 0.5% applicable to the sale
value of shares. The same transaction shall be taxed at flat rate of 4% of the
face value of securities if transfer takes place outside the stock market.
According
to the draft of the budget law those rates had to be raised to 1% and 6%
respectively. The latter rate of 6% had to be applicable if the time elapsed
from the date of establishment of the relevant company was not more than five
years at the date of transaction. Otherwise, one percent had to be added to
that rate for each year of extra life of the company, but maximum rate
applicable in this way intended to be 15%. This part of the draft was also left
unapproved.
3. A
green tax
Note
13 of the draft of the budget law had dealt with a chronic environmental issue,
that is the problem of used, and in many cases worn out cars moving along the big
cities' streets. One of remedies adopted by the draft had been the imposition
of an extra duty on such old vehicles. The duty in question had to be equal to
the normal annual duty applicable in different amounts to various types of
cars. The extra duty would have been applied to vehicles with a life not
exceeding 10 years. It should have been doubled, tripled and so on for each
additional 10 years of age of vehicles. In case of approval, this could be the
first environmental tax applicable in the country, but it was refused and
cancelled.
4.
Budgetary support for the tax organization
Unlikely
to the case of Customs Department, a similar support suggested by the draft of
the budget in connection with the Organization of Tax Affairs was rejected by
the parliament. Paragraph "i" of the note 1
of the draft had allocated a special fund (400 billion Rials
at maximum) to that organization with a view to be spent for improvement of
productivity, evolution of tax system, education, purchase of buildings and
equipment and other similar purposes.
****************
Value added tax in
By M.T. Hamadani
It is more than fifteen
years that the idea of introducing value added tax is nourished
and followed up by the government. The plan was first initiated by the Finance
Ministry and went through a long course of drafting and redrafting, comments,
criticisms and so on. The final draft prepared by that ministry was at last
approved by the Council of Ministers in September 2002 and a month later was
sent by the President to the parliament (Islamic Consultative Assembly) to be
enacted as a law. It was referred to internal committees of the parliament for
primary study and consideration. Deliberation at this stage continued for
nearly two and a half years and eventually the outcome was sent back (in last
April) to the plenary session of the parliament for another round of
deliberation.
Important
features of the draft in question are as follows:
1.
Supply of goods and provision of services within
2.
Every solar year will be divided into six tax periods of two months each.
Taxpayers shall be required to submit, within 15 days from the expiry of each
tax period, tax return of that period and remit the applicable taxes to
relevant tax offices.
3.
Article 12 enumerates a vast range of goods and services that will be exempt from
taxation. They include, inter alia, the following
categories:
-
unprocessed agricultural products;
- flour, bread, meat, sugar, rice, cereals,
milk and some other foodstuffs;
- paper for printing,
writing and newspapers;
- immovable properties;
- medicine and medical
services;
- services subject to tax
on salary income
- services rendered by banks and non-bank
credit and financial institutions;
-
transport services;
-
books and printed media; and
-
education and research services.
4.
Beside that, the article 22 authorizes the Finance Ministry to exempt some
businesses from the duties imposed by the law. Decision so taken, should be
approved by the Council of Ministers and there would be no need for approval of
the parliament.
5. Taxpayers are required to apply for
registration as such in accordance with the arrangements to be determined by
the tax organization. When supplying goods or services subject to taxation,
they should issue invoices according to the instruction of the same
organization. The taxpayers are also required to use books of accounts, cash
register machines or other means and methods of keeping accounts, which will be
determined by the tax organization. As it was mentioned earlier, they have to
prepare and submit tax returns six times a year.
6. The base of
computation of the tax will be the price of goods or services as recorded
on invoices. If no
invoices are provided by the taxpayer, the prevalent price of the goods and
services shall be taken into account. In case of importation the CIF value of
the goods plus relevant customs duties and fees will constitute the basis of
computation of the tax. The rate of value added tax shall be 7 percent in all
cases.
7.
The taxpayers refraining to comply with the duties prescribed under the law, or
committing an offence, shall be required to pay – in addition to the relevant
tax – a fine up to twice of the amount of the applicable tax at maximum.
Payment of the tax after the prescribed time limit shall result in application
of a late payment fine equal to maximum bank rate for facilities granted by
banks to the service sector plus one percent.
7. The State Organization
of Tax Affairs shall be responsible for management of all affairs related to
value added tax and enforcement of the law in question. It has been authorized
under the draft to take necessary actions in the field of organizational and
other aspects of execution of the VAT law.
Conclusion
Some points are worthy of
mentioning in respect of the VAT program in
a) The draft described
above will, in all probability, be approved by the parliament during the
current year, unless unexpected obstacles would arise.
b)
But the enforcement of the law would presumably be postponed for one, or even more,
years. The logic is obvious, and that pertains to lack of preparedness for
execution of such a tremendous program. As it was mentioned above, the draft
has exempted a lot of goods and services from the tax and also has provided for
exemption of unlimited number of businesses from the law. In all likelihood
retailers and majority of service providers shall be exempted in this way. It
would mean leaving aside a considerable number of businesses and services from
VAT and restricting its scope to wholesalers, plants and limited number of
services. But even in such conditions the introduction of VAT to tax system
would mean a positive step forward.
*************
General policies adopted in
connection with
the article 44 of the Constitution
According to article 44 of the
Iranian constitution three sectors are recognized for the economy of the
country: public, private and cooperative. Meanwhile, it has been envisaged
under the first paragraph of the article 110 of the same law that the High leadership
will have power and right to delineate general policies of the country after
consultation with the Expediency Council. Such determination of policies has
taken place recently in respect of
article 44 of the constitution (full text of the article 44 is given at
the end of this section). Taking into consideration the impact of these
policies on all aspects of the nation's economic life, including taxation, an
English translation of them is given below:
"General policies of the article 44 of the Constitution
of the Islamic Republic of Iran are hereby determined with due regard to the
last part of the same article and provisions of the article 43 of the
Constitution, so that to achieve the following purposes
- Accelerating the growth of national economy;
- Extension of ownership at the level of general
public with the aim of securing social justice;
- Advancement of efficiency of
economic enterprises and productivity of material, human and technological
resources;
- Enhancement of competitiveness of
the national economy;
- Increasing the share of private
and cooperative sectors in the national economy;
- Reducing the financial and
managerial burden of the government in connection with the undertaking of
economic activities;
- Raising the overall level of
employment;
- Encouraging all groups of people
to save and invest and also to improve the family income;
A – General policies regarding the
development of non-state sectors and prevention of enlargement of the
government sector
1. The government is prohibited from
embarking on new economic activities beyond the scope determined under the
first part of article 44 of the Constitution and shall be obligated to transfer
to cooperative, private and non-state public sectors – up to the end of the
term of the fourth development plan at
maximum – any kind of activities (including continuance of previous activities
and exploitation thereof) that are not specified under the first part of the
article 44 of the Constitution, so that its activities are reduced not less
than 20% per annum.
Taking into account the
responsibility of the regime for expedient administration of the state, the
government is permitted to continue, or to start, urgent activities beyond the
scope of the titles specified under the first part of the article 44 of the
Constitution, after such activities are proposed by the Council of Ministers
and approved by the Islamic Consultative Assembly.
Administration and production of
military, disciplinary and intelligence products of the armed and intelligence
forces that are of confidential nature shall be excepted from the rule of this
section.
2. Investment in, and ownership and
management of, the fields mentioned in the first part of the article 44 of the
Constitution shall be allowed for
institutions and foundations of the public non-state sector and also for
private and cooperative sectors, as is described below:
2-1. Major industries, mother
industries (including major industries of oil and gas downstream operations)
and major mines (including oil and gas).
2-2. Foreign trade activities within
the frame of commercial and foreign exchange policies of the country.
2-3. Banking by public non-state
institutions and by public joint-stock cooperative companies and joint-stock
corporations, provided a ceiling for each shareholder's share is determined by
the law.
2-4. Insurance.
2-5. Provision of energy, including
production and importation of electricity for internal consumption and also for
exportation.
2-6. All postal and communication
affairs, except for main networks of communication, provision of frequencies,
and principal systems of separation, exchange and distribution of base postal
services.
2-7. Roads and railroads.
2-8. Aviation (air transportation)
and navigation (sea carriage).
The optimum share of state and
non-state sectors with regard to activities of the first part of the article 44
of the Constitution shall be determined by due regard to protection of
sovereignty of the state, independence of the country, social justice and
economic growth and development.
B. General policies of cooperative sector
1. An increase of 25% in the share
of cooperative sector in the economy up to the end of the term of the fifth
development plan.
2. Taking effective measures by the
government for establishment of cooperatives for the unemployed with the aim of
creating jobs.
3. Supporting the establishment and
development of cooperatives by the government through methods such as tax
abatement, granting protective credit facilities via all financial institutions
and refraining from collecting any extra payments from cooperatives in
comparison with the private sector.
4. Removal of restrictions for
participation of cooperatives in all economic scenes including banking and
insurance.
5. Establishment of a cooperation
development bank with government capital
and with the aim of raising the share of
cooperative sector in the economy of the country.
6. Government supporting for access
of cooperatives to final markets and providing fair and comprehensive
information to that sector.
7. Exercising sovereign rights by the government through
policy making and supervision over execution of enacted laws and refraining
from interference in executive and managerial affairs of cooperatives.
8. Promotion of technical and
professional education and other necessary supports for raising the efficiency
and ability of cooperatives.
9. Flexibility and diversity in
methods of capital raising and distribution of shares in cooperative sector and
taking necessary measures so that in addition to ordinary cooperatives,
establishment of new types of cooperatives in the form of public joint-stock
companies with limitation of ownership of each shareholder up to a legally
determined ceiling would become possible.
10. Supporting the cooperatives by
the government in proportion with the number of their members.
11. Establishment of all-inclusive
national cooperatives to cover first three tenths of the population for the
purpose of removing the poverty.
C. General policies regarding development of non-state
sectors through transfer of government activities and enterprises
(General policies of this section
will be determined and announced afterwards)
D. General policies of transfers
1. Requirements of transfer
1-1. Enabling the private and
cooperative sectors to undertake extensive activities and manage major economic
companies.
1-2. Post-conveyance control and
support by relevant authorities for realization of purposes of transfers.
1-3. Using valid and healthy methods
of transfer with emphasis on stock market, strengthening the transfer
organization, establishment of a transparent system for provision of
information, creating equal opportunities for everybody, taking benefit from
gradual offering of shares of major companies in stock market to arrive at base
price of shares.
1-4. Disinterestedness of those
engaged in transfers and also of the government authorities involved in
decision making with regard to transfers.
1-5. Observance of general policies
of cooperative sector in connection to transfers.
2. Usage of incomes derived from
transfers
The funds derived from transfer of
shares of government enterprises shall be remitted to a special account with
the general treasury and shall be spent within the frame of approved plans and
budgets and as is described below:
2-1. Giving rise to self reliance
among depressed and deprived families and consolidating social security.
2-2. Allocation of 30% of the
incomes derived from transfers to all-inclusive national cooperatives with the
aim of removal of poverty.
2-3. Construction of economic
infrastructure while giving priority to less developed regions.
2-4. Granting facilities (managed
funds) for reinforcement of cooperatives, renovation and improvement of
non-state economic enterprises while giving priority to transferred
enterprises, and also for investment of non-government sectors in development
of less developed regions.
2-5. Participation of state-owned
companies with non-state sectors – up to a ceiling of 49% - for the purpose of
economic development of less developed areas.
2-6. Completion of semi-finished
projects of state companies by due regard to section "A" of these
policies.
E. General policies in connection with sovereignty exercising
and refraining from monopoly
1. Continuation of sovereignty
exercising by the government, after the coming forward of non-state sectors,
through policy making, enforcement of laws and regulations and controlling,
especially with regard to observance of religious and legal criteria, in
non-state banks.
2. Prevention of influence and
domination of aliens over the national economy.
3. Preventing non-government
economic enterprises from establishing monopoly through preparation and
approval of laws and regulations."
kkkkk
( Full text of the article 44 is as
follows:
(1) The economy
of the Islamic Republic of Iran is to consist of three sectors: state,
cooperative, and private, and is to be based on systematic and sound planning.
(2) The state sector is to include all large-scale and mother industries,
foreign trade, major minerals, banking, insurance, power generation, dams, and
large-scale irrigation networks, radio and television, post, telegraph and
telephone services, aviation, shipping, roads, railroads and the like; all
these will be publicly owned and administered by the State.
(3) The
cooperative sector is to include cooperative companies and enterprises
concerned with production and distribution, in urban and rural areas, in
accordance with Islamic criteria.
(4) The private
sector consists of those activities concerned with agriculture, animal
husbandry, industry, trade, and services that supplement the economic
activities of the state and cooperative sectors.
(5) Ownership in
each of these three sectors is protected by the laws of the Islamic Republic,
in so far as this ownership is in conformity with the other articles of this
chapter, does not go beyond the bounds of Islamic law, contributes to the
economic growth and progress of the country and does not harm society.
(6) The scope of
each of these sectors as well as the regulations and conditions governing their
operation, will be specified by law.)
The End