The Research Center of Majlis (Iran’s Parliament) has studied the economic influence of the value added tax (VAT) in Iran and released a report on its advantages and disadvantages in the country.

According to the report, easing the burden of income tax imposed traditionally on the end products will cause the growth of long-term investment and for this purpose VAT is the best choice and method of taxation.
Some economic experts believe that VAT performs as a contractionary monetary policy that seeks to reduce the size of the money supply, liquidity, and inflation rate while the others presume that once the sales tax is replaced by VAT, the sellers will see a price hike on the products, hence, they will increase the price and it would be imposed on the consumers and the producers of the tax-exempt products will see the tax levy on their output and will increase the prices as well and it will cause inflation in the country.
The report says that experience about VAT in some countries indicates that the countries witnessed a price hike only in a few months after the implementation of the VAT act and it had no effects on those countries’ inflation.
According to the Majlis Website, Seyed Mohammad Reza Seyed Nourani and Fatemeh Azizkhani believe that the researches in various countries show that there is an interaction between implementation of value added tax and informal economy so that the implementation of the value added tax has led to the extension of underground economy as well as to a decrease in social welfare.
The extension of informal economy leads to an increase in tax evasion and hence a decrease in revenues made by implementation of value added tax. This paper tries to answer the question “whether or not the implementation of value added tax is the best kind of taxation in Iran?” In doing so, considering the particular situation of Iran in terms of the factors influencing underground economy and tax evasion, the paper seeks to do a comparative study.
The results show that, in view of the ineffectiveness of the existing tax system, as well as the fact that this system is incapable of collecting tax from informal sectors, it is expected that the implementation of the value added tax system will lead to a decrease in tax evasion by increasing the effectiveness of the tax system. The results also show that the implementation of such a system will not enlarge the size of the underground economy in Iran.
The Majlis Website also quoted Mohammad Taghi Zyaee Bigdeli as saying that the value added tax (VAT) has been welcomed by many countries and it has been implemented by more than 150 countries. Such tax is imposed on value added produced by firms in different production and distribution processes. VAT has such advantages as increasing the revenues of the government, creating a vast basis for taxation, decreasing the motive for dodging tax, and relying on self-expressing methods. In addition it can easily be implemented and help self control mechanisms, and avoid double taxation and so on.
According to Iran Daily opponents of VAT argue that it will lead to a hike in the prices of goods and services. However, studies have shown that the inflationary effects of VAT could possibly be about 3 percent, which will become evident in the first two years of its introduction. Then again, it will have little or no adverse impact on the inflation rate in the long run.
Comprehensive research works indicate that VAT has increased state revenues by up to 50 percent in many industrialized nations, particularly those in Europe. The VAT law is projected to succeed in Iran, as experts maintain that it can become the most important source of revenues, regulate the country’s taxation system and promote economic reforms.
Studies conducted on the VAT bill show that its implementation could help the government have a stable source of income. It will also discourage people from overspending on unnecessary consumer goods.
An economic expert believes that the implementation of VAT at an inappropriate time will intensify the 25-percent inflation in the country.
The VAT Act was approved according to Article 85 of the Islamic Republic of Iran Constitution and in the Majlis’s Economic Committee session on May 6, 2008, and the Guardian Council gave a nod to the act on May 22, 2008.
As we referred to in part 1, the VAT act in Iran has been circulated on June 8, 2008 that made the media, press, and economic experts scrutinize the issue and its effects on the country’s economy. It also irritated some guilds such as the Iranian shopkeepers, known as bazaaris.
Gold jewellery merchants, and some others in the provincial capitals of Isfahan, Mashhad, and Tabriz have staged strikes to protest against the introduction of value added tax (VAT).
The move has pushed the government to announce that it will review the new VAT mechanism. IRNA quoted President Mahmud Ahmadinejad as saying in a letter to the Finance Minister Shamseddin Hosseini that “in order to implement this law you must study the obstacles and problems and find a way to ease concerns; it is necessary for you to give me a plan with a solution within two months for the proper implementation of this law.”
During this time, implementation of the VAT legislation would be suspended, Ahmadinejad said, adding the minister should consult with union representatives. Bazaar shop-owners feared that the VAT would increase prices and lower demand for their products.
The president of the Tehran jewellers’ guild, Kourosh Goharbeen, told ISNA that “In the meeting we had with tax officials we agreed to postpone implementation of VAT in our trade for three months.