Investigating the Structure of Sustainable Urban Incomes and Calculating the Value Added Tax Gap of Tehran Municipality

Municipalities, as the main pillar of urban management, need sustainable revenues to provide sustainable management and organize the city. Dependence on non-continuous and unstable revenues of municipalities, including construction income and lack of executive guarantee necessary to obtain tolls and legal revenue, have caused instability in their revenues. Finally, it is possible to amend the relevant law in the following periods by recognizing the jurisdictional and subject defects and guaranteeing the implementation of the value-added tax law and the methods of solving them. This will reduce the conflicts between the tax affairs organization and the municipalities. The share of Value-Added Tax in the revenue sources of Tehran Municipality has been about 20%. So, the main problem of this research is to investigate the structure of sustainable urban revenues and calculate the amount of lost VAT revenue of Tehran Municipality due to the policy gap (pursuing specific government policy goals through tax exemptions, setting the threshold and tax credit) and the compliance gap (tax avoidance, evasion, and fraud), during the years of implementation of the VAT law.

The VAT gap is calculated using Mackenzie’s (1991) method and Input-Output Table and applying data on economic activities in Tehran in the International Classification System (ISIC. The first step in calculating the tax gap is to calculate the potential capacity of value-added tax based on consumption, where investment expenses and export of goods and services are deducted from the tax base, and the import of goods and services is added to the value-added tax base. Moreover, in calculating the legal tax base, the value of tax-exempt goods and services is deducted from the potential base, and the amount of double taxation during the production-distribution chain is added to the tax base.

Based on the calculations made in 2017, the potential revenue from VAT was equal to 24 thousand billion tomans, of which the government’s share was 16 thousand billion tomans, and the share of Tehran Municipality was 8 thousand billion tomans. Additionally, the value-added tax gap was equal to 18.8 thousand billion tomans, of which 12.4 thousand billion tomans was the policy gap and 6.3 thousand billion tomans were the compliance gap. The government’s share of the policy gap was 8.3 thousand billion tomans, and the share of Tehran municipality was 4.1 thousand billion tomans. The government’s share of the compliance gap was 4.2 thousand billion tomans, and the share of Tehran Municipality was 2.1 thousand billion tomans.
The results show that the ratio of policy gap to potential VAT in Tehran was 51.7%, and the ratio of compliance gap was 26.2%. In other words, about 78 percent of potential tax revenue has yet to be received as a result of the policy and compliance gap. Therefore, clearing up the ambiguities and challenges of implementing the VAT law and completing its provisions in the field of guaranteeing the implementation and updating of beneficiaries, processes, rates, exemptions, scope, and threshold of exemption play an essential role in reducing the VAT gap and increase the sustainable income of the government and municipalities.

In recent decades, unstable incomes have been one of the most critical measurements of municipalities’ income, which is obtained from ways such as the sale of density and the issuance of building permits. This factor causes stagnation in the budget deficit of municipalities during fluctuations in the economy, which has caused many problems for the cities of our country. Value-added tax as a sustainable income of municipalities has had a share of 20% of Tehran municipality’s revenue resources. Still, its implementation has had flaws in jurisdictional, subject, and enforcement areas. Based on this, articles 123 and 138 specify the method of distribution of tolls. However, the basic issue, which is the guarantee of the collection of tolls, is still uncertain. Regarding the issue of guaranteeing the collection of tolls by municipalities and the necessity of strengthening the fields of local tolls and related foundations and innovative categories in this field with the approach of income stabilization, the bill under consideration in the parliament lacks a reliable ruling. What has been seen from the latest amendments and omissions of the plan due to the objections of the Guardian Council and the views of the commission in the Islamic Council is far from the strategies contained in Article 174 of the Fifth Development Plan Law and other requirements for stabilizing municipal income.In this research, the potential value-added tax capacity of the Tehran government and municipality has been calculated using the data-output table, and by deducting the exemptions and adding the effect of the tax cascade, the legal base of the valuadded tax has been calculated. Finally, by calculating the potential and legal income of value-added tax, the policy gap and the gap of non-compliance caused by the application of the value-added tax system have been calculated based on the share of Tehran Municipality and the government. The obtained results indicate that the ratio of policy gap and compliance of value-added tax to the potential base of value-added tax in Tehran city was 53% and 27%, respectively. In other words, about 80% of the potential tax capacity has yet to be collected.Considering the flaws in the areas of competence, subject matter, and the guarantee of the implementation of the value-added tax law, in this research, it is suggested that by removing the flaws in the implementation of the value-added tax law and completing its provisions in the field of guaranteeing the implementation and updating the subjects, processes, rates, Exemptions, the scope of inclusion and the threshold of exemption, important steps to be taken in order to strengthen the fields of local taxes and related foundations and innovative categories in this field with the approach of stabilizing incomes and reducing the tax gap and increasing the sustainable income of the government and municipalities.