Monetary and Capital Market Exclusive, March 2004

Monetary and Capital Market in Iran

	Tug-of-War: Stocking  Taxes? or Taxing Stock?
Dr. Hussein Abdoh Tabrizi, Director of Tehran Stock Exchange			Dr. Ebrahim Sheybani, Governor of the CBI
The monetary and capital market should compete under the same conditions.			We had decided to levy taxes on the banking deposits, share bonds and stocks but no agreement was reached.

A new scandal in Iran’s capital market comes to the fore on a daily basis. In addition to the newspapers reflecting the dispute between the Ministry of Economic Affairs and Finance and the Tehran Stock Exchange (TSE) financial blogs are also looking into the matter. The case is not so sophisticated. Financiers, stockholders, investment companies and relevant individuals or stakeholders have forcefully opposed an article in the draft budget for the fiscal year starting March 2004. The controversy gathers momentum and news sources intend to disclose new details of the festering dispute. Some are of the view that everything is under control and the Ministry of Economic Affairs and Finance will win the match while some others tie the dispute to politics and call for “exiting the market”.

The bone of contention involves an article in the draft budget raising taxes from 0.5% to 2% for real and to 5% for legal entities engaged in the Tehran Stock Exchange. Dismissing the superficial and sudden decision, opponents maintain that such a drastic rise would give a serious shock to next year’s exchanges in the market. They also warn of serious consequences such a measure would have for the Iranian economy. In reaction, the proponents say the new mechanism would bar formation of any bubble in the stock market and encourage long-term investments.

The Central Bank of Iran (CBI) is dragged into the dispute and the managers of investment companies have gravely objected to the intervention of CBI Governor Ebrahim Sheybani. Informed sources claim that Issa Shahsavar Khojasteh, Head of the Taxation Affairs Organization, recently proposed to the government to work out a new mechanism for levying taxes on the banking deposits, share bonds and other financial tools including stock exchanges. Khojasteh offered the suggestion in order to reform the taxation structure but Ebrahim Sheybani and other bank presidents voiced opposition.

Senior financial managers involved in the banking system held numerous meetings. In his capacity as the CBI Governor, Sheybani opposed the imposition of taxes on the share bonds and banking deposits. But as the Chairman of the Stock Exchange Council, he authorized the Taxation Affairs Organization to increase taxes on stock exchanges. In the end, an article was invoked in the draft budget for next calendar year scaring big stockholders.

From the very beginning, the Head of the Tehran Stock Exchange Dr Mohammad-Reza Abdoh Tabrizi voiced his opposition to the decision. He claims that he was not in the current of the affairs leading to adoption of the decision and his assertion is a bit illogical. He says: “I was informed of the decision several days after its approval and I reject it. Anyone engaged in the stock market is opposed to this decision. Stock markets levy no tax on the capital gain which is a tax on wealth. Assume that someone bought a share from Fars-Khuzestan ten years ago. Now, his wealth does not change even if he sells it at a very high price. So why should he pay taxes? The entire world is lifting any tax on wealth but Iran is reviving this procedure! Such taxation strikes a blow to competition in the stock market.”

Tabrizi highlights unequal conditions for competition in Iran’s markets and says: “The monetary and capital market should compete under the same conditions. The monetary market is exempt from any tax but the stock market faces backbreaking taxes. We should not impose any tax on capital gain. There is no country with such a process.”

Tabrizi has given the assurances that the parliament would easily close its eyes on this article. He has wooed the legislators but no prediction is possible so long as the Ministry of Economic Affairs and Finance makes no comment. Tabrizi’s remarks must not reflect the future realities. His objection constitutes a segment of widespread opposition to the “tax-incorporating article” in the draft budget. Economic weblogs and websites are also debating the sticking point.

Taxation Affairs Organization Backs Decision: Issa Shahsavar Khojasteh is not well acquainted with stock market affairs. He says: “We are well informed of what is happening in the stock market. The market has registered good growth since March 2001. In my capacity as the Head of the Taxation Affairs Organization, I cannot turn a blind eye to such income and the stock market has to account for the government’s share.”

 He continued to say that “half of the deals in the stock market are based on hidden information and the bourse council has yet to pass a bylaw against clandestine information. I feel obliged to regulate the affairs in the economic sector. I am the government and I am not a stakeholder. Nor am I an economic current. I am preoccupied with the affairs of the government.”

Regarding the CBI intervention, he says: “The Central Bank of Iran has not intervened and it has accounted for its duty. We had decided to levy taxes on the banking deposits, share bonds and stocks but no agreement was reached. Sheybani was abreast of the affairs.”

As for the views of the Minister of Economic Affairs and Finance on the article, Khojasteh says: “No minister has given any negative view of the article and we are waiting for the lawmakers to make the final decision. I believe that the decision would not dampen the passion for stock market.”

Others maintain that the Taxation Affairs Organization has taken into account the future of the stock market.