The Forum for Partners in Iran's Marketplace

January 2020, No. 93


Banks, Taxation System Are Unkind to Industry!

Under the current situation, part of the disorderly condition of production and industry is due to the outrageous and cruel sanctions.

There are few countries in the world where their officials talk about the need to support production and industry more than our rulers. Cabinet ministers and lawmakers lay emphasis on efforts to boost production and industry as their top priority in their speeches and interviews. Judiciary officials have repeatedly spoken about the damage that smuggling of goods and the underground economy inflict on domestic production and industry, threatening offenders with severe penalties. In fact, we do not know any official whether at national or provincial level who does not consider the prosperity of the country’s production and industry to be the key to getting rid of the country’s economic turmoil.

So why have the ship of the country’s industry run aground and the owners of capital have been avoiding entry into production field? What is this magical force that stands up against the vast and powerful front that virtually holds all of the country’s economic leverages and strives to support production and industry, and thwarts its decisions?

Of course, under the current situation, part of the disorderly condition of production and industry is due to the outrageous and cruel sanctions. Statistics, however, show the deplorable situation of our manufacturing and industry is not limited to the sanctions times. Failure of our country’s economic custodians to boost production and increase investment in the industry sector has nothing to do with magic. Perhaps the reality is that the good intentions of some officials who seek to support production and industry lose weight against stronger incentives that bring them more “desirability”.

Available statistics and information support this last assumption. According to deputy minister of industry, mine and trade, the share of industry in our country’s GDP is 12%. Yet more than 60% percent of the country’s total tax is paid by the same industry sector. In contrast, the services sector, which accounts for 51% of the country’s GDP, pays only 22.1% of the country’s total tax (this is while the industry’s share of taxation is 3.2% in Malaysia, 13.6% in South Korea and 16.5% in France). The services sector, which has the largest share of GDP in advanced industrialized countries, pays the highest tax (sometimes more than 70% of the total taxes).

In other words, “our taxation system is not capable of levying tax on many services sectors including property developers, traders without IDs, some high-income businesses in big cities, bank deposits, and so on.” In fact, between 40% and 50% of economic activities are tax-exempt. “But the industry is behaved in an unfair way and its whereabouts are known. And it is for this reason that “although the value added tax is a consumption tax, VAT is placed on the capital formation, that is, investment in machinery and equipment...”

Do people other than statesmen and lawmakers draw up and approve our taxation laws? Of course, the answer is no. And, therefore, cannot lip services by some authorities for production and industry be regarded as “calculated expediency”?

Banks are also harsh on the industry and grant loans to industries reluctantly, partly because most industrial loans are long-term and partly because banks are familiar with the deplorable condition of the industry.

From their point of view, why they should grant loans to build a factory which is both long-term and they know they will have trouble getting it back instead of giving short-term and low-risk loans to cross-sectional transactions. That is why although the law considers a 40% share of the total facilities for the industry, according to the existing statistics, only 27% of the banking facilities go to the industry sector.

In our country, being active in the industrial sector is like swimming in the opposite direction of the water in a roaring river. Its challenges and repulsions are numerous and its returns very low or negative. As a result it is no surprise that investment in the industrial sector has been on the decline for years. The rate of gross fixed capital formation (GFCF) has been plunging since 2011, so that “the yearly absolute value of GFCF at fixed prices in 2018 was less than 70% of the capital formation in 2011. A review of the time series of GFCF shows that the amount of investment at fixed prices in the Iranian economy in 2018 has almost returned to that of early 2000s. ”

The decline in investment in machinery sector (the most important component of fixed investment in industry) has been particularly grave. The amount of investment in the machinery sector in 2012 declined so much that its absolute value has been even lower than in the early 2000s. The free fall of GFCF in industrial machinery over the 2010s has made this situation much worse. The country’s economy will pay a heavy price for this in the future. The decline in investment in the industrial sector has many reasons; among them are uncertainty about the future and distrust in the policies of the government. Despite all this, the most important reasons behind the reluctance of capital owners to invest is the industrial sector are the numerous challenges and the low (or negative) rate of returns in industrial activities in our country. Otherwise, what is the reason for some of the “pseudo-investors” to put all or part of the facilities they have apparently received for the industry into other areas (which are likely to have less challenges and higher returns)?

Aren’t those who give lip services to production and industry in the Majlis and the government really able to reduce the challenges and costs of the industry and shift a little of the pressures to “those other areas”? Is it anything other than what the likes of South Korea, Malaysia and Turkey have done? 

By: Dr. Farrokh Qobadi


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  January 2020
No. 93