Tax on Savings Interest;
A Path towards Development of Iran’s Economy
By Mahdi Goodarzi & Mojde Rezaee
Taxation is central to a country’s development by providing a stable flow of revenue to finance development priorities. In Iran, more than 50% of the government budget relies on tax income; this income has grown by 22% over the past 10 years largely owing to the value added tax law and has reached IRR 1,700,000 bn.
Under the current circumstances where oil price and consequently, the government revenue are declining, ways to increase this income seem to matter more than ever. In the Fourth, Fifth and Sixth Development Plans, expanding tax bases has been mentioned as one of the major axes, which will improve transparency in addition to creating more revenue.
Tax on Savings Interest in Iran
Applying tax to the interest earned from savings account has been implemented in many countries intended to increase the government revenue as well as supporting investment in real parts of their economy.
The former Minister of Economy and Financial Affair has recently talked about the necessity of applying tax to savings interest, stating the below 12% inflation rate, risk free nature of such an investment and the received high interest as the logic behind it; Mr. Tayebnia had previously supported the opposite when the inflation rate had hit 40% while the interest rate hovered around even less than half of it.
Since banks’ establishment in Iran, such interests were announced to be tax free because account holders were assumed to deposit the money whose tax had already been paid. This led to interpreting savings interest as the risk free interest with which every other type of investment started to be compared.
The problem, however, is that economic activities, which pay tax (up to 25%) in addition to going through all troubles and risks, must offer a considerable return (significantly higher than banks’ interest rates) to worth the while of investors. Therefore, high, tax free and fully guaranteed interest income will encourage keeping money in banks and adding fuel to the fire of economic recession, besides increasing interest expenses for economic practitioners.
Challenges & Requirements
The pre-requisite to implement this plan necessitates requirements, including shutting down un-supervised financial and credit institutions and lowering the current interest rates. In fact, the major challenge threatening Iran’s economy is high interest expenses, originated from high interest rates. We must note that applying tax to savings interest might not only raise such expenses, but also may result in the flight of capitals from the banking system; this might be the reason for CBI officials’ silence about the minister’s speech.
What Does Law Say?
Article 145 of the Direct Tax Law states that interest income earned from savings accounts in authorized Iranian banks and credit institutes are tax exempt while the Iranian National Tax Administration is obliged to apply tax to the interest paid to deposits in unauthorized banks and credit institutes.
Besides, applying tax to interest income requires the inclusion of the whole income a person makes, which needs access to some additional information, whose infrastructure is not ready, yet.
Unless all banks fully commit to cooperate in providing the required information on accounts, there exist concerns over the flight of money from those banks which have supplied the information to the Organization to those that have not. For this reason, banks will implement this plan only when they are assured that it will be done by all.
What endangers the economy here is the escape of money to areas like gold, foreign exchange market and the housing sector, causing wide fluctuations, instead of being directed towards production and the capital market. In fact, applying tax to savings interest will act just like a double-edged sword cutting both ways.
Opponents and Proponents
Executing this plan requires its approval in the Majlis and then, the Guardians Council; it must first become a law, that seems to take a long and complicated process.
Although not advocated by many economic practitioners, the plan is supported mostly for 2 reasons: some believe that there has come the time for the government to lean more on tax income; if this must be withdrawn merely because some will lose their tax-exemption benefit, the pressure on the current taxpayers will remain high. Furthermore, many experts assume that the banking system must seriously solve the problem of unauthorized banks and credit institutions in order to not be disturbed by activities which are indeed to the benefit of the country’s economy.
In fact, this matter should not lead us into ignoring the major role banks, which are grappling with credit crunch due to high rate of NPLs, toxic assets, etc., played in this mess, being cornered into paying higher interest rates to keep investors’ interested and satisfied as well as afraid of implementing such plans.
It is worth mentioning that officials have stressed that small-figure savings (up to a certain level) held by individuals will continue to remain tax free and the rumor has it that deposits above IRR 5,000 mn will be subject to tax in the first phase of implementing this plan.
Account holders’ deposits play a crucial role in banks’ survival. This, nonetheless, should not drive attention away from the matter of “supplying production units with required resources”. Pushing deposits stored in banks towards industrial and production units, hungry for liquidity and capital, which is hoped to take place after implementing this plan, can blow a fresh breath to Iran’s economy. Under the current conditions, not only will entrepreneurs who invest in industry suffer from their capital value loss, they will also lose the opportunity to grow their capital under inflation, leaving them empty handed and disappointed compared with the savings account holders’ interest along with pushing them towards unconstructive fields. Resorting to solutions tested at international levels such as lowering the interest rate intensified with applying tax to savings interest might put an end to such oppression. All in all, the implementation of this plan might result in capital holders reconsidering their options, among which production and industry areas will definitely be, boosting growth in economy on one hand and providing the government with a considerable amount of revenue on the other.
DISCLAIMER: This report has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.
To contact reporters: Inter@agah.com