A ten-day strike at Tehran’s Grand Bazaar has ended in an uneasy truce, but neither the government nor the merchants angered by tax rises believe it will last.

The strike was the most serious confrontation yet between the regime and the merchant class, which played a major role in the 1979 revolution and went on to become a pillar of the Islamic establishment.

The relationship has soured over what the traders see as intrusive government policies. For their part, the authorities seem determined to have their way, and it is unclear whether the merchants will be able to hold out.

The strike at the Grand Bazaar began on July 6 in protest at a proposed 70 per cent increase in the sales tax rate. Almost immediately, the government offered a compromise – Deputy Trade Minister Mohammad-Ali Zeighami said the increase would be reduced to 30 per cent.

No deal, said the merchants. The government then bought some negotiating time by closing all public-sector institutions in the capital on July 10 and 11, citing the extremely hot weather as the official reason.

After marathon talks between the trade ministry and the Council of Guilds, which includes merchant associations – it was announced on July 10 that the two sides had settled on a 15 per cent tax rise.

Yet the agreement did not end the strike, which instead spread to other cities – in particular Tabriz in the northwest, where the massive covered market was more or less shut for business. Merchants at the Tabriz bazaar have close ties with those in Tehran.

The merchants insisted their strike was justified given the hard-pressed state of the economy.

“In these conditions, anywhere else in the world the government would be helping financial institutions, but in Iran it’s raising taxes,” said a leading trader, who did not want to be named.

On July 7, the day after the strike began, uniformed and plainclothes police raided the Tehran bazaar and tried to coerce merchants into opening their shops, sometimes even by assaulting them. In one incident, a well-known textile trader called Azizollah Kashani was stabbed and killed.

The overwhelming presence of riot police and plainclothes agents at the market recalled scenes from the protest that followed last year’s disputed presidential election.

The opposition Green Movement was initially delighted that the merchants had come out against the government, but its enthusiasm faded with the realisation that the merchants’ grievances had little to do with politics. Traders held themselves aloof from last summer’s demonstrations, even when they took place close to the Tehran bazaar, and ignored calls to stage a sympathy strike.

DECLINING POLITICAL ROLE

Although not aligned with the opposition, the bazaar is a force to be reckoned with when roused. In December 2008, the three main bazaars in Iran – Isfahan in addition to Tehran and Tabriz – shut down in protest at plans to impose value-added tax. The government simply caved in and dropped the plan. In May last year, the owners of electronics stores on Tehran’s Laleh-Zar Street staged a two-hour strike that forced police to withdraw units deployed there as part of a law-and-order crackdown.

Apart from immediate concerns about of taxation, the Iranian merchant class has been unsettled at the gradual loss of first economic and later political power over the years. After the outbreak of the Iran-Iraq war in 1980, merchants who had played an instrumental role in the revolution found that their economic power was gradually slipping away into the hands of the state. The trade ministry began to control both production and commerce, formerly the domain of the traditional guilds.

Politically, too, the bazaar was slowly sidelined by successive governments. The free trade zones which the government set up in border areas in the Nineties provided serious competition to the bazaar for the distribution of goods.

It might at first sight seem strange that traders stayed out on strike even though the Council of Guilds that represents them had struck a deal. However, the reasons become clearer when one realises that the Council is actually a modern institution, set up under reformist president Mohammad Khatami as a way of marginalising the old merchants’ organisations.

Khatami’s successor Mahmoud Ahmadinejad inherited the council when he was elected in 2005, and his administration now backs it. By continuing to strike, the merchants were defying both council and government.

When they did end their protest on July 16, it was on their own terms. Their decision is believed to have been prompted by the circulation of letter from a group of veteran merchants calling themselves the “Trustees of the Imam and the Leader”, and signed by Habibollah Asgaroladi, a former secretary general of the Motalefeh party, who advised them to halt the strike.

Motalefeh is a conservative party widely regarded as the political arm of the bazaar, and it is closely linked with the Society of Islamic Guild and Bazaar Associations, the prime mover behind the strike. There was thus no contradiction when the society’s head Ahmad Karimi Esfahani implied later that his organisation helped bring the strike to a close.

The merchant’s party has some grounds to be unhappy with the current government in Iran. It backed Ahmadinejad both in 2005 and when he stood for re-election last year, yet it has not been rewarded with cabinet posts and has largely been ignored and belittled. Ahmadinejad’s support for the Council of Guilds is also an attempt to curb the party’s traditional support base.

CONCERN AT TRADE POLICIES

The strike highlighted the power of solidarity in the bazaar, but also pointed up some clear differences among its members. The 2.7 million people who work in this sector fall into various groups like importers, exporters and distributors, who have fared unevenly under the Ahmadinejad government and therefore take differing views of it.

Those involved in the export trade, for example, have long been critical of economic policy.

Assadollah Asgaroladi, a major exporter of nuts whose brother Habibollah was formerly head of the Motalefeh party, attacked what he said were obstructions to productivity in an October 2008 interview for the newspaper Jam-e Jam.

He criticised populist policies designed to funnel money into people’s pockets, and said the government would be wiser to lift the burden of taxes and fees imposed on production and commerce, which would stimulate real economic growth and prosperity.

“Ahmadinejad is causing us to suffer from ‘self-sanctions’ at home,” he said. “He creates obstacles to production, investment and trade, and this results in prices going up and demand coming down.”

Another category of merchants, those who retail domestically-manufactured goods, feel they have lost out because of import controls that they regard as far too liberal. During the recent strike, the head of the Tehran Textile Merchants’ Union, Mohammad Hossein Nourayi Ashtiyani, complained that the unrestricted influx of Chinese and Thai clothes and textiles was slashing demand for their locally-made equivalents.

By contrast, import traders and their distributors in Iran are perfectly happy with the current policy direction, which has allowed them to bring in goods at will while oil revenues have been used to create artificially high levels of spending power to buy these items.

BATTLE OVER OPAQUE TAXABLE INCOME

For its part, the government has an interest in levying more tax from the bazaar and getting a firmer grasp of the real income generated by the sector.

All the merchant guilds taken altogether generated just 1.2 billion dollars in taxation last year, contributing at most five per cent of total tax revenues.

It could be argued that even the 70 per cent increase initially proposed for this tax take would not be very significant, making the government’s efforts look rather self-defeating. But public statements by the government during the strike suggested that the low tax take was due to tax evasion by merchants, whom it portrayed as blackmailing the authorities to avoid closer inspection of their books.

Unlike civil servants, whose taxes are deducted at source, merchants pay tax only on their declared income.

Until this year, tax inspectors were able to select a random sample of up to five per cent of bazaar merchants and go through their accounts. This year, the government decided to change the rules. The increased tax rate was offered as an alternative to a system where the sample subjected to tax inspections would be increased to ten per cent.

To the merchants in the Tehran bazaar, none of these options looked particularly appetising.

Members of the Goldsmiths’ Guild played a major role in the strike out of a sense that they would end up paying more than their fair share of taxes. They have to be more transparent than most, logging their trading activities and keeping their wares for sale on the premises.

“The world bullion market determines our prices every morning and these are the same all over the country,” said one trader. “Every sale and purchase is logged. Why should we be treated the same as a locksmith who owns a two-metre shop in the bazaar but has a warehouse a few kilometres.”

The kind of shop he was referring to is easy to spot at the Tehran bazaar, as there are no goods on sale. Instead, the owners buy or sell goods by telephone without them ever going through their hands. Such traders will naturally be reluctant both to open their accounts to closer inspection and to pay higher taxes.

At the same time, merchants are by no means the only group that pays less taxes than they should. Many companies affiliated to the state or to the Revolutionary Guards maintain lavish offices in upmarket north Tehran, but manage to pay hardly a cent in taxes.

As one merchant put it, “If there’s a decision to move toward transparency, the government must start with itself.”

NOT OVER YET

For the moment, the dispute between government and bazaar is in abeyance. But there is every chance it could resume.

Given Motalefeh’s role behind the scenes, an economics professor in Tehran argues that the merchants’ strike should be seen as a warning to the Ahmadinejad administration.

“It conveyed the objections of a group of former government supporters, such as some of the conservatives and high-ranking clerics,” he said. “The Ahmadinejad government needs to respond not by reaching an agreement on lower taxes, but via policy.”

Even if they have fallen out with Ahmadinejad, the merchants still have powerful connections. They remain one of the main financial backers of senior ayatollahs, and this axis could be dangerous for a government which has fallen out with many senior Shia clerics.

The bazaar also retains its role as a source of news and rumour, still regarded as credible by people who are otherwise envious of the merchants’ prosperity. This nationwide network is one from which the seeds of discontent could spread rapidly.

Despite suffering a setback, the government appears unwavering in its determination to do something about the bazaar.

On July 18, the Sunday after the Friday on which the strike ended, the edition of the hardline newspaper Kayhan, Hossein Shariatmadari, was clearly articulating the official view when he dismissed the central role claimed by the bazaar.

“If the bazaar merchants were to close their shops indefinitely, nothing bad would happen,” he wrote, “The majority of them are [mere] middlemen in the sale of goods.”

He added that the government could establish its own markets elsewhere.

One thing is clear – the government has had a defeat inflicted on it, and its authority has been called into question. It is likely to try to regroup and gather strength for the next confrontation. This was the first time the police employed violence against protesting merchants. Next time, the authorities might try force on a wider scale.

Yasaman Baji is the pseudonym of an Iranian journalist based in Tehran.