The tax dispute between the Iranian government and the powerful gold trade shows no signs of going away. Although the merchants called off their all-out strike a month ago, a working group set up to mediate a solution does not seem to have come up with a deal.

Gold dealers in Tehran’s bazaars closed their shops on September 25 to protest at plans to impose value-added tax, VAT, on the trade.

It was the second rebellion in a matter of months that the government had faced from the wealthy traditional merchant class, previously seen as a bastion of conservative support for the Islamic regime. The whole of Tehran’s central bazaar, soon joined by the market in the northwestern city of Tabriz, staged an unprecedented ten-day strike in July over plans to dramatically raise sales tax. In the end, a compromise was reached where the government agreed to impose a lower rate of tax than it had initially planned. (See Tehran Merchants in Showdown With Government.)

The plan to levy VAT on gold transactions represents a further attempt by the cash-strapped government to increase revenue levels, and in the process clamp down on what is believed to be wide-scale tax evasion. The government tried to launch its VAT scheme in 2008, but backed down following a strike by gold merchants.

The gold merchants were initially joined by traders in iron, but these went back to work after four days. Meanwhile, the gold strike spread to other cities and towns across Iran.

This time, the authorities stood firm, and deployed police and other security units the gold markets. Two well-known Tehran gold traders, Esagh Shadbash and Mehrdad Fatah, were arrested and others were forced to reopen their shops.

By October 5, with no sign that the merchants were about to retreat, the authorities held a meeting with them at the Imam Khomeini Mosque, a traditional meeting place in Tehran’s bazaar district. It was not a success, according to traders who attended. They told Mianeh they were pressured to sign a statement backing the government’s policies, and were warned that their shops would be sealed if they persisted with the strike.

The following day, some dealers reopened, but kept their shop fronts darkened and empty of goods as a sign of protest.

By October 10, the strike was over, as agreement was reached that a joint working group consisting of government officials, members of parliament and representative of the Gold and Jewellery Union would look into the tax dispute.

The deadline for the group to complete its work passed on November 10. Four days beforehand, the head of the tax service, Ali Asgari, made it clear that the VAT scheme would go ahead, and the only concessions the government was willing to make were a slight reduction in the rate and an agreement not to delve into the merchants’ past accounts and dealings.

The merchants argue that gold is a commodity which retains a basic value whether it is melted into ingots or made into jewellery, and should therefore not be subject to VAT every time it is transformed into a new item. The result, they say, will be that the retail price of gold will go up.

“The government should not be collecting VAT every time manufacturing takes place,” Reza Rasekh, head of the guild of Shiraz goldsmiths, said. “Instead of this, taxes should be levied from service fees and profits.”

Furthermore, dealers in gold insist their transactions are already above board – they buy ingots from the Central Bank of Iran, register all their business operations, and retain all customer receipts.

The government counters that VAT is paid by the retail customer, not the merchant himself, who thus has no reason to complain. Officials say the real reason the traders are squealing is that a VAT scheme will require them to reveal the true number and value of transactions they have conducted, and allow any taxable item to be traced back to where it originated from.

“The goldsmiths are worried that once the real size of their income becomes known [through VAT checks], they will have to pay more in income tax,” said tax chief Asgari the day the strike started.

For many years, gold traders and other bazaar merchants have not been obliged to keep accounts, and tax inspectors calculate the amount payable from whatever evidence they find in the retail outlet, and on the merchant’s own declaration of income.

The result, according to a financial-sector expert in Tehran, was that “every year the inspectors would arrive at the merchant’s store in the bazaar on a certain date, and generally there would be nothing there but a desk, a chair, a phone and some worthless merchandise. The merchant would show the inspector a few forged invoices showing a paltry sum of money, and then complain about the state of the economy.”

He concluded, “These merchants are buying and selling millions of dollars’ worth of merchandise on their cranky old phones, yet they only pay a few hundred dollars [tax]. That has now become more difficult to do.”

Gold is greatly valued in Iran, both for jewellery and as a way of storing value. The country has at least 15,000 shops selling gold jewellery.

The insatiable demand for gold offers a clue to another reason why the government is keen to get a grip on the trade – to clamp down on smuggling.

Gold bullion can legally be imported into Iran, but other forms known as “consumer gold” cannot.

The result is a thriving trade in illegal imports of gold items.

An Iranian jeweller described the simplicity with which these imports can be brought in. “I travel to Dubai in the morning and order some gold jewellery. When I get back to my shop in the afternoon, I can see that the bag containing the order arrived sooner than I did,” he said. “Who can carry smuggled gold more easily than a passenger acting as courier?”

Mohammad Kashti-Aray, head of the Gold and Jewellery Union of Iran, told the IRNA news agency that only two of the 300 tons of ‘consumer gold’ in Iran were of domestic origin. Meanwhile, the customs service says that gold bullion imports in 2009 totalled to 22 tons.

So where is the rest coming from?

The Jahannews website, run by a powerful member of parliament, Ali-Reza Zakani, offered a blunt answer, saying, “Ninety per cent of the consumer gold in the country has been smuggled in.”

A prominent Tehran gold merchant adds, “The monetary value of gold smuggling runs into billions of dollars. The government is aware of this, but has been unable to stop it because of the power of the smuggling network. We goldsmiths say this smuggling network is backed by God Almighty – no one can defeat it.”

According to a local journalist, the “gold mafia” has strong backing in parts of the Iranian administration, making it impossible to curb the illicit trade.

The government, he said, “wants to make up for its impotence by imposing the VAT law”.

Smuggling fills a gap created by the decline of Iran’s own gold-working industry, which used to export on a large scale. Over the last 50 years, however, lack of investment and failure to acquire state-of-the-art tools and equipment from abroad has made goldsmiths less and less competitive, and many workshops have closed.

A veteran gold trader believes the government could turn the situation around, revive exports and stamp out the need for smuggled imports by either sourcing modern metalworking machinery itself or offering loans to workshops to buy it. He argues that the government has so far neglected the sector because of a mistaken belief that it is economically unproductive. Others suspect the smugglers would use their connections to obstruct efforts to revive domestic manufacturing as this would hurt their business.”

Nevertheless, a gold trader in Tehran argues that the government is wrong to clamp down on the industry as a whole just to squeeze the illicit part of the trade.

“The way to restrict gold smuggling is not by exerting pressure on the market and the production-consumption cycle,” he said. “We aren’t all smugglers. The government needs to think up appropriate policies to prevent smuggling.”

More broadly, some have welcomed the stand taken by the gold industry because it shows someone is willing to challenge government policy.

“It should be seen as a good sign,” a professor of political economy said. “The bargaining the guilds are engaging in over their profits [to ensure that] suitable legislation is drafted is an important step towards curbing a government that has got used to sinking its claws into every sector of society.”