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VAT to Give Way to Consumption Tax
February, 06th 2017

Consumption tax will replace value added tax as of next year (March 2017-18) as per a motion proposed by the Majlis Joint Budget Commission.

The decision is part of the budget bill for the upcoming Iranian year (March 2017-18) and will become law upon the approval of lawmakers.

Proponents of the initiative believe the mechanism of consumption tax system is simpler and more effective compared to VAT. They also argue that it will help improve transparency and prevent corruption.

Critics, for their part, maintain that consumption tax is the same old system with a new title and that policymakers have failed to introduce a noticeable change in the consumption tax process.

Two main violations are usually reported when it comes to the implementation of the VAT Law. First, some business owners charge their customers VAT but do not pay the tax money to the government. Second, the government collects the VAT but avoids paying the revenues to related bodies. To prevent such violations, only the final consumer—the last point in a distribution chain—must be charged consumption tax, the Persian daily Shahrvand reported.

The VAT Law took effect in the Iranian year to March 2009 and has since taken a lot of flak for its ambiguities. One such criticism is that the law should not be levied on producers or importers in the first place and that only the final consumer must pay a 9% VAT rate.

This is while deputy chairman of the commission, Hadi Qavami, says a 9% VAT was imposed on each level of the distribution channel during the past years.

“One of the main reasons behind the replacement of VAT with consumption tax is to narrow the value added tax base to the final consumer,” he added.

Qavami noted that consumption tax and VAT are two sides of the same coin, stressing that the only difference is that during the implementation of VAT, some areas of the taxation remain unclear and pave the way for corruption and lack of transparency.

“Consumption tax will rid producers of bureaucracy and corruption. And the government would be able to narrow the budget deficit through consumption tax,” he said.

Iraj Nadimi, a former lawmaker and current advisor to Budget and Planning Organization, has reasons to think otherwise. He says what is problematic about VAT Law is its poor execution.

“What has been proposed as consumption tax only addresses the approach but does not put forth a solution for the problems associated with the implementation or the process of taxation,” he said.

Nadimi believes the overhaul of the current VAT system could lead to a more efficient, workable system than introducing the new consumption tax.

VAT collection during the nine months to November 20, 2016, increased by 35% compared with last year’s corresponding period, according to the deputy head of Iran National Tax Administration, Mohammad Masihi.

“VAT rebates to exporters increased 47% during the eight months to November 20,” he said.

Value-added tax accounts for 48% of the government’s total tax revenues. Despite protests from traders, the 9% VAT rate approved by the parliament back in March 2014 remains in force in the budget law for the 2016-17 fiscal year.

Clause 2 of Article 117 of the Fifth Five-Year Economic Development Plan (2011-16) stipulates that the government is required to increase VAT by one percentage point annually as of the first year of the program’s implementation.

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