By Mahnaz Abdi

CGT for more productivity, less reliance on oil income

June 25, 2019

In order to reduce intention for investment making in non-productive sectors, many countries impose capital gains tax (CGT) which is a tax on capital gains with different rates of taxation for individuals and corporations.

As defined by the Investopedia, capital gains tax is a levy assessed on the positive difference between the sale price of the asset and its original purchase price. Long-term capital gains tax is a levy on the profits from the sale of assets held for more than a year. Short-term capital gains tax applies to assets held for a year or less, and is taxed as ordinary income.

While CGT prevents from the wealth to be owned just by a few people, it leads the liquidity toward production, and help re-distribution of wealth and income in the society.

CGT has come under the spotlight in Iran during the current Iranian calendar year (began on March 21), as the country is investigating different ways for a budget plan with no reliance on the oil income, and collecting taxes is one of the major ones.

The proposed 17.03 quadrillion rials ($405 billion) budget bill for this Iranian year has envisaged 1.53 quadrillion rials (about $36.5 billion) of tax income.

Earlier this month, Iranian Minister of Finance and Economic Affairs Farhad Dejpasand said that reducing the current year’s budget dependency on oil exports is the most important economic objective in the country.

Last week, the minister also stressed that an efficient tax system should be a priority in the government’s policy making, and put emphasis on the necessity of imposing capital gains tax.

 New tax strategies required

Mohammadreza Pour-Ebrahimi, the chairman of the economic committee of Iranian parliament (Majlis), said on June 8 that new tax strategies should be taken and new taxes should be imposed in order to reduce the gap that is becoming larger and larger between the poor and the rich due to the effects of the fluctuations in the foreign currency exchange rate.

In this due Majlis has put approving the capital gains tax plan on agenda, he added and said that this plan is in the final stage to be approved for housing market and the government is preparing it for some other markets as well.

A non-oil budget requires other stable income sources, and the government is considering tax on non-productive assets as one of the major sources in this regard, Pour-Ebrahimi said.

Not only is capital gains tax an effective instrument for establishment of fairness and economic quality, it can also help the government reduce reliance on oil revenues.

CGT should avoid liquidity outflow from one market to other ones

While imposition of CGT is considered necessary, it also should be taken into account that such tax may lead the liquidity flow from a specific market (such as housing market) to the other ones (like foreign currency market or gold coin market).

Such condition can cause damage to the market entitled to the CGT in a way that, for example in housing market, it can reduce investment making in construction of new houses.

At the same time, outflow of the liquidity to the parallel markets can increase fluctuations in those markets.

And as incomplete implementation of a law, once all aspects of it are not considered, can bring results worse that those when there is no such law at all; to impose CGT it should be done simultaneously in the parallel financial and asset markets.

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