In the past, Iranian officials had focused on increasing non-oil tax revenues, particularly through direct taxes on personal and business income. A major reform of the tax laws in 1967 nearly doubled direct tax revenues within two years. Additional legislation in the 1970s had the effect of increasing the importance of direct taxes, which grew to US$2.5 billion in FY 1976, up from US$156 million in FY 1967.

Like most developing countries that produced oil, Iran had relied on indirect taxes (customs duties and excise taxes) for most of its non-oil revenue. Indirect taxes accounted for 72 percent of non-oil tax revenues in FY 1962, 60 percent in FY 1972, and 45 percent in FY 1976. In FY 1986, indirect taxes fell 12 percent as a result of a 30-percent reduction in customs duties.

The rapid increase in oil production and oil revenues in the 1970s freed Iranian officials from having to develop the tax system. As a consequence, the narrow tax base focused on consumers generally and on the urban, salaried middle class specifically. In 1977 fiscal authorities attempted to reform the tax system. But the numerous exemptions, particularly those that had been granted to industries to encourage private investment, presented obstacles to the continued expansion of direct taxes.

By 1985 government workers were paying a disproportionate amount of Iran's taxes--nearly three-quarters of all taxes in FY 1984--according to the government. For example, in the last few months of 1984 about US$16 million was collected from individuals in the private sector and US$510 million (or 76 percent of tax revenues) from government employees.

Taxes were expected to contribute US$15.7 billion to the budget in FY 1987, an amount 11.2 percent less than that approved the previous year. In the FY 1987 budget, direct taxes were reduced to a level that accounted for 46 percent of tax income, while indirect taxes accounted for 53 percent. Companies accounted for most of the direct taxes (54 percent). Of the indirect taxes, 40 percent came from taxes on imports, and 60 percent from consumption and sales taxes. A decrease in imports resulted in an overall decline in tax revenue.

The decline in revenue from indirect taxes (such as customs duties) in FY 1986 caused total tax revenues to fall 1 percent below the FY 1985 level. The collection of direct taxes simultaneously increased by 9.5 percent, partly because of a new option that permitted payment of taxes into a regional development fund. Businesses paid income taxes at a higher rate than individuals, and the tax rate on government corporations was higher than that on private businesses.

Data as of December 1987