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Maliyat journal (Iranian Tax Review)
No. 42, autumn 2006
IN THE NAME
OF ALLAH
FROM THE PRESIDENT
A necessary step towards reformation of an organization with the aim of
enhancing its efficiency and effectiveness would be the embarking on a program
of studying the practices and approaches established therein by lapse of time
and evolved to an ordinary way of handling the current affairs. As regards the
tax organization, a similar situation may be encountered with regard to one its
significant functions, namely the assessment of chargeable income of taxpayers.
According to the tax law, the principal and normal method for assessment of
taxable income is determined to be the reference to statutory books, accounts and
records of relevant taxpayers. Based on such a method, the real situation of
taxpayers and their actual profits and losses ought to be ascertained as far as
possible, and the same is to be taken as the basis of applicable taxes.
The law has also envisaged a situation where the taxpayers' accounts and
records are out of reach, or they are deficient in a way to lack the necessary
conditions for examination. Certain
mechanisms are provided by the law for these cases, such as arbitrary or
ex-officio assessment, application of tax indices and coefficients and the
like.
But resorting to these devices should be confined to
situations where ample justification would exist for such treatment. They must
not be overused or misused in a way to convert them from exception to common
rule. Having recourse to mechanisms in question frequently and beyond the
limits which the law and the nature of cases would necessitate, may also be
taken as an indication of tendency towards inactivity and evasion from
difficulties of thorough investigation of details of relevant cases. A behavior
of this kind would entail proliferation of unnecessary tax disputes and, as a
consequence, waste of time and valuable resources of taxpayers, as well as
those of the tax organization.
The practice in question is not a produce of today or
yesterday. It has been the legacy of long long ago.
Traces of certain efforts for curtailing its dimensions can be found in some
amendments made to the tax law itself. As an example we can refer to the Note 2
of the Article 97 of the Direct Taxes Act. The basic purpose of that article is
to determine the cases where the method of ex-officio assessment of taxable
income may be applied. But in the same very article it has been emphasized that
assessment of income must take place on basis of actuality and by referring to
accounts and records of taxpayers as far as is practicable.
The fact should obviously be taken into account that
the undesirable approach referred to above is not a common practice and only a
group of taxmen are inclined to take benefit from it. But we have to admit that
such a tendency is contrary to the idea of dynamism of tax organization and
against the spirit of the law. We have, therefore, to hold it in check and do
our best to restrict the application of ex-officio assessment to legally
permitted occasions.
What mentioned above would not obviously mean that the
procedure of ex-officio assessment is to be wholly abandoned. The purpose is to
conduct the affair to its legal and natural channel. Should there exist real
conditions for resorting to ex-officio assessment, its application would
obviously be allowable. What is unacceptable is the mentality of evasion from
endeavor and effort for ascertaining the real situation of tax cases. Even in
case of ex-officio assessment, the law would require the utmost effort of
officials for finding necessary information so that the assessment of income
and application of tax indicia can be effected on basis of reliable data.
Article 237 of the tax law is of special significance in this respect, which
has to be taken into consideration in all discussions with regard to tax
decisions. According to that article: "The tax assessment notice should
be drawn on a correct basis and must be substantiated by sufficient evidence
and information, in a manner to reflect manifestly all related activities and
incomes derived therefrom, so that to be clear for
the taxpayer".
That ruling reflects the spirit of all the matters and
reasoning provided in the present editorial, and beside that, would testify the
conformity of the same reasoning with legal requirements.
No need to say that such a treatment would cause, at
the same time, the confidence and sympathy of taxpayers to be attracted more
than before. Reduction in number of disputes, betterment of position of tax
officials in defending their decisions and securing more prestige for tax
organization, are amongst the additional benefits attributable to such logical
and dignified approach.
Dr. Aliakbar Arabmazar
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VAT
– A tentative law
By: Dr. Mohammad Tavakkol
Deliberations
and discussions on value added tax have been going on for quite a long period.
To find out how long this process has been continuing, we would refer to
proceedings of the parliament (Islamic Consultative Assembly) for the date of
12 Jul. 2006, where a member of the parliament stated:
"For
many years our governments, beginning from the government of HE Engineer Mousavi, as well as the government of HE Hashemi Rafsanjani, had in mind to establish the VAT in
this country. But unfortunately it has been delayed due to some reasons and we
have not been able to apply this taxation in the country".
That
statement means that the idea of having VAT goes back to decade of eighties of
the past century.
The recent
bill of VAT, which is presently under deliberation in the parliament, had its
first reading completed and its generalities okayed
around one and a half year ago. Then it was referred to the Economic Committee
of the parliament for detailed examination. As it can be
understood from the text of the parliamentary debates: "The Committee
has had lengthy talks in this regard and has not arrived at an overall
conclusion so far".
Probably
those delays and postponements have induced the parliament to resort to a
solution envisaged under the article 85 of the Constitution, which reads as
follows:
”The
parliament cannot delegate the power of legislation to an individual or
committee. But whenever necessary, it can delegate the power of enacting certain
laws to its own committees, by due observance of the Article 72 hereof. In such
a case, the enacted laws will be executed on a tentative basis for a period
specified by the parliament, and their final approval will rest with the
parliament" (Article 72 states that enactments of the
parliament must not be contrary to religion or the Constitution).
The proposal for
application of the article 85 of the Constitution to the bill of VAT was
approved by the majority of MPs present at the same session of 12 Jul. 2006.
Thus, the first Iranian VAT law is going to be a tentative and experimental
law, of course after being approved by the Economic Committee. The reasons
provided for such treatment were as follows:
1. Saving the time – In
case of going through the ordinary channel of the parliament, much more time
would have to be spent as a result of long debates of the plenary session of
the parliament.
2. Correcting the law –
During the probationary period, defects and weaknesses of the law will be
revealed and the final law will be drafted by removing the defects.
3. Stability – Since the
law would go through an experimental period and thus its defections will be
corrected, much more stability and durability can be expected from the final
enactment.
Contrary side of the
argument
Those against the
proposal of approving the law in the frame of the article 85 of the Constitution, argued that the law on VAT may have reverse
effects on economy and production, because it would be apt to interpretations
that may cause the burden of taxation to be transferred to producers, instead
of consumers. Such unwanted situation may occur due to existing structural
shortcomings and defects. As an example they referred to the Law on Aggregation
of Duties, which had been enacted with a view to pass the burden of duties and
similar charges to consumers. But the purpose of the law was not realized and
in most cases it was the producer who endured the burden.
Based on that, the
opponents of the proposal wanted the bill to be dealt with as an ordinary draft
so that all MPs would have opportunity to express their views in open sessions
of the parliament. In this way, according to them, the law would have better
chance of being scrutinized and hammered out, so that the approved tax may sustain
and serve its original and real purpose.
Notwithstanding the
arguments of those against the proposal, it was, as we said earlier, approved
by majority of MPs. As a result, the bill will be handled not by the parliament
at large, but rather by an internal committee of it, namely the Economic
Committee.
Expectation
Whereas the Economic
Committee has been busy in reviewing the bill for a quite a long while, one may
have justification to expect that ultimate fruit would at last ripen not far
from now. But some indications against that expectation is
inferable from the parliamentary proceedings of the same session of 12 July
2006, for instance:
a) The Committee may
possibly have in mind to introduce some changes to existing tax laws
simultaneously with approval of the VAT law. We find the following statement in
this regard:
"The first point is
that we have become prepared to write this law in coordination with other
taxes. For example, it would not be the case that this tax [VAT] be approved
while other taxes are remained untouched. No! We have to revise them as
well". In proceedings reference has been especially made to the Direct Taxes Act
and the Law on Aggregation of Duties. This issue may not appear so simple in
practice. It might be easier in respect of the latter law, since it is possible
to annul all or majority of existing duties after the VAT is established (a
point that has been expressly foreseen in the text of the bill of VAT itself).
But as far as the Direct Taxes Act (main tax law of the country) is concerned,
the issue will certainly be more complicated.
b) It has been also
mentioned at same session of the parliament that the Committee has in mind to
introduce some kind of time table for enforcement of the law. For that purpose,
the taxable goods (and perhaps the services as well) will be classified to
categories such as alimental, chemical, pharmaceutical, metals, etc. The
priorities for coverage of the law to different categories will be determined
under the time table. Such timetabling is something new and had not been
foreseen in the original text of the bill. More difficulties and delays may
arise from alterations of this kind. One may ask whether the experimental term
of the law is to be continued for how many years, that to permit such gradual
execution? Taking into account the difficulties of enforcement of a wholly new
and unprecedented taxation, we may perceive how a knotty situation would arise
because of mixing those difficulties with inconveniences of the aforesaid
timetabling.
c) In proceedings of the same
session we find also this statement: "In case of VAT, we have three,
four models. One is the western model. Well, we can not follow that. We have to
put forward models by compilation".
Such being the case, one may
become less optimistic about the availability of a VAT law in near future. May
be just for the same reason a member of the parliament has expressed his wish,
as an aspiration, that the VAT law may become at hand up to the end of the
fourth development plan (March 2010). And finally, the same status of affairs
may have persuaded the parliament to resort to mechanism of the article 85 of
the Constitution, since otherwise much more delay would have been encountered.
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Policy lines of the section "C" of
the
Article 44 of the Constitution
As our
readers may recall, we had given an English translation of the general policies
of the article 44 of the Iranian Constitution in No. 38 of this magazine (the
issue of summer and autumn, 2005, pp 8-12). As it was mentioned in that issue, under the said article
44, three separate sections are recognized for the economy of the country:
public, private and cooperative.
Meanwhile,
the Constitution (article 110) has vested the High Leadership with the power to
delineate general policies of the country after consultation with the
Expediency Council. Such policies had been determined before in respect of the
said article 44 of
the Constitution, a translation of which was printed in this Maliyat journal.
But a part of
those policies, namely the paragraph “C”, article 44, had not been determined
at that time. It had been postponed to a later occasion (see paragraph “C” of
general policies, Maliyat, 38, 11). That section “C”
has also been completed recently. Below you will find an English translation
of these newly determined policies.
As we pointed out previously (Maliyat, 38, 8),
the policies in question would have considerable impact on all aspects of the
country’s economy and therby on taxation. That is the reason why
we have chosen to present the following translation.
General policies regarding
development of non-state sectors through transfer of government activities and
enterprises
In the name of God the merciful and compassionate
Section "C" of the general policies of the article 44 of the
Constitution of the Islamic Republic of Iran:
- Having regard to the necessity of
economic growth and development of the country on basis of realization of
social justice and removal of poverty within the frame of twenty-year outlook
of the country,
- To change the role of the government from ownership and direct management
of enterprises to policy making, guidance and supervision,
- Strengthening the private and cooperative sectors in the economy and
protecting them, so as to enhance the competitiveness of products in the
international market,
- To prepare the domestic enterprises for smart confrontation with rules of
international trade in a gradual and directed process,
-
Development of science base and specialized human capital,
- Developing and enhancing national standards and conforming the system of
quality evaluation with international standards,
- Orientation of privatization towards the enhancement of competitiveness
and public ownership, and
Based on the proposal of the Expediency Discretion Council, the section
"C" of general policies of the article 44 of the Constitution of the Islamic
Republic of Iran is hereby notified in accordance with the section 1 of the
Article 110 of the Constitution:
- Transfer of eighty percent of the stock of state enterprises, as
specified under the main section of the Article 44, to private sector, public
joint stock cooperative companies and non-state public enterprises is
authorized as is described below:
1. State enterprises that are active in the fields of
major mines, major industries and mother industries (including major industries
of oil and gas downstream operations), except the National Iranian Oil Company
and companies of extraction and production of crude oil and gas).
2. State-owned banks, except the Central Bank of
3. State insurance companies, except the Central Insurance and Insurance of
Iran.
4. Aviation and navigation companies, except the Civil Aviation
Organization and Organization of Ports and Navigation.
5. Institutions responsible for provision of energy, except the primary
networks of energy transmission.
6. Postal and communication institutions, except for
mother networks of communication, the affairs related to provision of
frequencies, and principal systems of separation, exchange and management of
distribution of base postal services.
7. Industries affiliated with the armed forces, except
for necessary defense and security products as identified by the Commander-in-
Chief).
Requirements of transfer
a) Pricing of the stock shall be conducted through the
stock market.
b) Public bidding together with appropriate information providing for
encouraging and inducing the public participation and preventing the creation
of monopoly and information rent.
c) To insure appropriate output for the shares of the companies subject to
transfer, necessary reform should be carried out with regard to market, pricing
of products and proper management on basis of the Commercial Code.
d) Transfer of the companies subject to the project should be brought about
in the form of specialized parent companies and affiliated companies by
observance of considerations of overall expertise.
e) To improve the management of the enterprises subject to transfer and to
enhance their productivity, necessary measures are to be taken for attraction
of experienced, specialized and efficient managers by exploiting the managerial
capacity of the country.
Selling in installments is hereby permitted in respect of 5% of the stock
of the companies subject to section "C", to the managers and
employees of such companies.
f) Since the section "C" of the general policies of the article
44 of the Constitution is hereby notified and thus the governmental functions
are modified, the government has to regularize and execute its new role in
connection with policy making, guidance and supervision over the national
economy.
g) Allocation of a percentage of transferred resources to new areas of
progressed technology towards the sovereignty functions is permissible.
Sayyed Ali Khamnei
The End
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