Legislators on Sunday extended the enforcement of value added tax for the upcoming fiscal year (starting March 21) and dropped the newly-proposed article narrowing the tax base to the final consumer.

On Saturday, Minister of Economic Affairs and Finance Ali Tayyebnia and Chairman of Iranian National Tax Administration Seyyed Kamel Taqavinejad voiced concerns over replacing VAT with consumption tax, saying the move would lead to the loss of close to 400 trillion rials ($10.58 billion) in revenues, IRNA reported.

Tayyebnia said as many as 500,000 taxpayers, including major producers and importers, pay around 150 trillion rials ($3.96 billion) as VAT every year.

“If consumption tax becomes law, tax authorities will have to deal with over 3 million retailers across the country,” he added.

VAT is a general consumption tax collected incrementally, based on the value added at each stage of production or distribution, whereas the proposed consumption tax narrows the tax base to the final consumer.

Advocates of consumption tax believe the mechanism is simpler and more effective compared to VAT. They also argue that it will help improve transparency and prevent corruption.

Two main violations are usually reported regarding the implementation of VAT Law. First, some business owners charge VAT but do not pay the same to the government. Second, the government collects VAT but avoids paying the revenues to related bodies.

To prevent such violations, only the final consumer—the last point in a distribution chain—must be charged consumption tax, according to a report recently published by the Persian daily Shahrvand.

According to INTA chief, VAT accounts for 50% or 1,700 trillion rials ($45.04 billion) of government revenues.

“INTA pays over 600 trillion rials of VAT revenues to municipalities and 50 trillion to the Health Ministry for the Healthcare Reform Plan,” he added.

The VAT Law took effect in the Iranian year to March 2009 and is being extended every year. VAT currently stands at 9% in Iran.