Iranian merchants protest new levy

Economic anxieties caused in part by the West’s financial crisis have escalated tensions between President Mahmoud Ahmadinejad’s government and Iran’s merchants as the country’s economic lifeblood, oil, headed below $80 a barrel for the first time in more than a year.

On Sunday, rug and fabric dealers in at least two cities joined an unprecedented week-long strike led by jewelers in most major business centers to protest the imposition of a 3% value-added tax and demands for more transparent accounting practices by retailers.

Merchants in the traditional marketplaces of Tehran and Tabriz shuttered their businesses Sunday even though the government has agreed to delay imposition of the tax on many retail and wholesale transactions for two months.

Whole sections of downtown Tehran’s massive and labyrinthine Grand Bazaar were closed Sunday, the second day of the Iranian workweek, people said. Though the most powerful wholesalers were believed to be leading the strikes, smaller shopkeepers also took part. Protesters angry over the tax smashed a branch of the state-owned Bank Saderat, according to the Borna news agency, which is close to the government.

The central bank also demanded Sunday that Iranian merchants and other businessmen with outstanding loans catch up on their payments. The move appeared to be a sign that the government is hoping to make up for the sudden drop in oil prices and the anticipation of prolonged worldwide economic malaise.

“All bad debtors to the banks are warned to pay back their installments in arrears,” Mahmoud Bahmani, the newly appointed central bank governor, said in an interview broadcast on state radio. “If there’s more delay, they will be fined and will have to pay the fine in addition to their debts.”

This month, Iranian cleric Ayatollah Ahmad Jannati called the meltdown of capital markets in the West “divine punishment.”

But economists predicted Iran also would suffer badly from any slowdown because of its dependence on oil sales. In recent days, the price of oil has fallen below $100 a barrel, a threshold Iranian officials had called unacceptable.

Tax revenue makes up only about a fifth of the Iranian government’s budget, a weakness that authorities in Tehran have vowed to address by clamping down on opaque accounting procedures. Independent economists have lauded the new rules as a necessary step to modernize the country’s archaic economy.

But the new tax, which exempts foods, medicines and other non-durable products, has fueled fears that already exploding consumer prices could creep higher if merchants pass on the costs to consumers.

“The strikes in the bazaar are the first middle-class reaction to galloping inflation,” said Saeed Leylaz, an economist and journalist often critical of the government. A report by the central bank said inflation for the Persian month ending Sept. 21 rose 29% compared with the same period last year.

Conflicting political loyalties underlie tensions. Bazaar merchants, a pillar of the 1979 Islamic Revolution that brought Iran’s Shiite Muslim clerics to power, mostly remain loyal to the conservative political faction led by Ayatollah Hashemi Rafsanjani, a relative pragmatist and rival of Ahmadinejad’s who built up his power base among the merchants during the 1990s.

Many view Ahmadinejad’s economic policies as favoring companies close to the Revolutionary Guard, an elite branch of the military, which relies on government contracts and control over Iran’s borders for its wealth.

Both factions are competing fiercely ahead of Iran’s upcoming presidential election, scheduled for June.

Iranian authorities have long worried about the economic cost of sanctions imposed over Iran’s refusal to suspend its uranium enrichment program or a sudden downturn in oil prices, which had reached $147 a barrel this year. To prepare, reformers have urged Ahmadinejad to slash burgeoning subsidies on commodities such as sugar, wheat and cooking oil. A move to ration subsidized gasoline sparked riots in Tehran this year.

Iranian lawmakers approved the value-added tax in January and it was scheduled to take effect Sept. 22, but protests broke out among gold dealers in several major cities. Small-business owners said customers grew furious when they tried to collect the tax.

“We were cursed by every single customer who bought anything from us,” said Ali Hassani, a clerk at a stationery shop in downtown Tehran.

The government suspended the unpopular tax for two months, a move one former official described as politically expedient and illegal.

The tax accompanies the new accounting requirements that make it tougher for Iranian merchants to shield revenue from tax collectors, another point of contention between businesses and the government.

“This tax, which never existed before, will enforce transparency and touch a privileged class,” said Thierry Coville, a Paris-based French scholar who is an expert on Iran’s economy. “The demonstrations are an instinctive reaction from some people who are not used to paying taxes.”

Often merchants pay taxes in one lump sum at year’s end, concealing much of their earnings by penciling in codes into ledgers.

“The bazaar merchants have their daily journals and accounting methods which can be deciphered only by themselves,” said Hamid-Reza Taraghi, a spokesman for the right-wing Islamic Coalition Party, which is close to the merchants but supports the value-added tax. “The government should train the merchants first to keep regular accounts and use official cash registers so that everything will be transparent.”

Sympathy was in short supply for the merchants, who are perceived as having benefited greatly under the Islamic Republic. Some called the idea of forcing merchants to pay their taxes a matter of fairness.

“Generally speaking, people do not want to pay tax -- it is common behavior everywhere,” Jamshid Pazhohan, an economist, told the daily newspaper Etemaad. “But regardless, those bazaar guilds who make fortunes should pay appropriate taxes.”

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daragahi@latimes.com

Special correspondent Mostaghim reported from Tehran and Times staff writer Daragahi from Beirut.