When a Broad and Incorrect Interpretation of the VAT Law Strangles Production!

The story began with Article 26 of the Value Added Tax (VAT) Law (enacted in 2021). The legislator, with the logical goal of controlling consumption, stipulated that the tax on final tobacco products would increase by 5% annually. However, a major challenge arose when the Customs and the National Tax Administration, through a broad and arbitrary interpretation, extended this tax increase to raw materials and production inputs (i.e., raw tobacco and tobacco blends)!

📉 What was the outcome of this executive decision?
In the first instance, an exponential 250% growth in the tax rate for raw materials over a short period. Furthermore, locking up the liquidity of production enterprises, imposing massive losses on the industry, and ultimately creating a dangerous breeding ground for the expansion of smuggling were the direct results of this broad interpretation.

Through continuous follow-ups by the private sector, the Legal Deputy of the President intervened. Invoking Article 51 of the Iranian Constitution (Note for foreign readers: This constitutional article dictates that no tax shall be established except by explicit law, which strictly prohibits government agencies from expanding tax scopes through internal interpretations), they emphasized that the tax increase on final products cannot be generalized to raw materials.

Finally, the Specialized Board of the Administrative Court of Justice (Iran's supreme judicial body for challenging and annulling illegal government regulations) issued a definitive ruling (No. 140531390000730725) in May/June 2026 (Khordad 1405 in the Iranian calendar). The Court drew a line through this interpretation, explicitly declaring that the annual tax increase has no connection to or extension over raw production materials, and that the Tax Administration's actions lacked legal validity.

The most bizarre part of the story is here: Despite the clarity of the law, the ruling of the Administrative Court of Justice, and even the circulars of the First Vice President mandating executive agencies to follow the opinions of the Legal Deputy, the Tax Administration and Customs are still resisting the implementation of the law and have not revoked their illegal directives. This means an executive deadlock, the price of which is being paid by the private sector.

💡 What is the solution?
In a detailed research report I recently compiled (the full file of which is attached to this post), while meticulously dissecting the legal arguments of the disputing parties and analyzing the economics of this case, I proposed utilizing the legal capacity of the Government-Private Sector Dialogue Council. (Note: This is a high-level statutory body in Iran, consisting of top government ministers and private sector representatives, specifically designed to resolve regulatory hurdles and facilitate the business environment).

📄 I recommend reading this research report to all economic actors, policymakers, industrial managers, lawyers, and public law researchers. (The report file is available in the attachment).

Written by Reza Bastani Namaghi