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Proposed new taxes to fund defense projects cause public stir

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The Turkish government’s plans to impose new taxes to boost the country’s defense industry that are likely to further strain the finances of most Turks has led to public dismay in the midst of a constantly increasing cost of living, with many questioning the real motivations behind the move.

The ruling Justice and Development Party (AKP) submitted a 12-article bill to parliament on Friday stipulating that people with a credit card limit of at least 100,000 lira (close to $3,000) will have to pay an annual tax of 750 lira ($22) from January 2025 to bolster the defense industry.

The proposed legislation aims to create new revenue for the Defense Industry Support Fund (SSDF), also through the imposition of fees in a number of transactions in addition to the credit card tax.

For instance, both buyers and sellers are supposed to pay a 750 lira service fee in real estate transactions, 375 lira for other transactions at the land registry, 3,000 lira for the registration of new vehicles, 1,500 lira in used car sales and 75 lira for other transactions carried out at notaries public.

These payments will be listed as service fees and will be transferred to the SSDF.

If it goes into effect, this legislation, which was to be discussed at parliament’s Planning and Budget Committee possibly next week, is expected to generate 70-80 billion lira ($2 billion-$2.3 billion) for the SSDF.

However, it was announced late on Tuesday that due to public backlash, the proposal had been shelved until 2025. In the intervening time, the AKP is expected to make revisions during the parliamentary committee stage, including increasing the credit limit threshold.

New tax burdens

The proposed legislation comes at a time of an unequal tax scheme in Turkey, where ordinary citizens bear a greater burden, while well-connected companies receive significant tax breaks.

Many Turks also complain about the rising cost of living, with inflation standing at around 50 percent. People think the government is putting an extra burden on financially challenged families through new taxes instead of addressing their hardships and producing other solutions that will ease the financial constraints of these families.

Inflation in Turkey has surged over the past two years, peaking at an annual rate of 85.5 percent in October 2022. Although official data showed it slowed to 49.4 percent in September, the high cost of living remains a challenge for many families that have difficulty meeting even their most basic needs, let alone paying their rent and bills.

Indignant Turks reacted to the proposed legislation by calling their banks to lower their credit card limits.

Amid the public backlash, Finance Minister Mehmet Şimşek defended the proposed tax during a televised interview on Tuesday, saying it is necessary to keep Turkey militarily strong.

“Our country has no choice but to increase its deterrent power. There’s war in our region right now. We are in a troubled neighborhood,” Şimşek told private broadcaster NTV. “If we enhance our deterrence, our ability to protect against regional threats will increase.”

He acknowledged the criticism and noted that the bill is in the hands of parliament, while promising to take the objections into consideration.

Şimşek also emphasized the necessity of additional resources for defense projects. “The Defense Industry Fund is an off-budget fund. Resources are needed for defense projects. With a 750 lira contribution from credit cards, we will build an iron dome and establish an air defense system. This requires funding,” he said.

What is the SSDF?

Established in 1985, the SSDF is managed by the presidency. Its resources include annual allocations from the state budget, additional taxes collected from the sale of alcoholic beverages and tobacco products, transfers from foundations established to strengthen the Turkish Armed Forces, up to 5 percent additional tax collected from fuel oil, shares deducted from income tax revenue, contributions from paid military service revenue, donations and revenue earned from the fund’s assets.

Opposition criticism

The main opposition Republican People’s Party (CHP) has expressed criticism of the proposed bill, accusing the government of using the national security issue as a pretext to collect more taxes from the people.

CHP leader Özgür Özel said taxes are collected from people based on their earnings not based on their credit card limits, which are automatically increased by the banks in Turkey, most of the time without the consent of their customers.

He said recent remarks from Erdoğan warning of a security threat from Israel were actually aimed at paving the way for this legislation, portraying the country at the risk of a war with Israel.

Erdoğan, who has been an outspoken critic of Israeli actions in Gaza, accusing it of committing genocide, has recently suggested that Israel’s ambitions could extend to Turkey.

CHP spokesperson Deniz Yücel echoed a similar view and accused the AKP government of exploiting national sentiment to mask the economic crisis in the country. “The AKP is trying to create a fake ‘foreign threat and war agenda’ with the rhetoric of ‘Israel may attack us,'” Yücel said. “We see that they are trying to disguise the economic crisis they caused.”

The Turkish Parliament convened in a closed session last week to discuss the alleged threat from Israel, but Özel expressed dissatisfaction with the session. He said in a later statement that there was no need to worry about Erdoğan’s remarks concerning Israel being a “national security threat” to Turkey. He said the government provided nothing to substantiate Erdoğan’s claims during the closed-door meeting.

Middle East conflict, a pretext?

The AKP’s parliamentary group chairman, Abdullah Güler, echoing the government’s stance, suggested that regional conflicts necessitate a stronger defense industry, explaining the need for the new resources for the defense industry.

“While we are in the middle of these significant developments geographically, we need to make our defense industry stronger than ever,” Güler said, referring to the ongoing conflicts in the Middle East.

Those conflicts have raised global concerns about a broader war erupting in the region. Israel’s clashes with militants in Gaza and Lebanon, along with missile strikes involving Iran, have recently heightened tensions further.

The AKP’s allies also support the proposed legislation, citing national security concerns.

Mustafa Destici, chairman of the ultranationalist Grand Unity Party (BBP) and a an ally of Erdoğan, criticized those opposing the introduction of new taxes aimed at boosting the defense industry, warning that Turkey may end up being a war-torn country if people fail to make this sacrifice.

“Those using credit cards with limits over 100,000 lira will give 750 lira to the state [in taxes], and this is for the defense industry. Give it, brother; if you don’t, your end will be like Syria, Iraq or Palestine,” Destici said, claiming that at a time when soldiers are risking their lives for the country, giving 750 lira will not burden people financially.

Focus on Selçuk Bayraktar and Baykar’s role

As the government seeks additional funding for the defense industry, attention has turned to Selçuk Bayraktar, chairman of Turkish defense contractor Baykar and President Erdoğan’s son-in-law, with many questioning whether the move is aimed at making Bayraktar richer.

Bayraktar owns 52.5 percent of Baykar, which has been exporting drones to dozens of countries.

The company reported sales of $1.4 billion in 2022, and its exports rose to $1.8 billion in 2023, thanks to contracts with a number of countries’ military forces in Europe, Africa and the Middle East.

Bayraktar, who married Erdoğan’s daughter, Sümeyye, in 2016, has been listed in Forbes billionaire rankings.

Turkey’s defense companies signed contracts in 2023 worth a total of $10.2 billion, according to Haluk Görgün, head of the Presidency of the Defense Industry (SSB). The top 10 Turkish defense exporters contributed nearly 80 percent of total export revenue, he said. Sales of Baykar drones, used in conflicts such as Nagorno-Karabakh and Ukraine, amounted to $1.8 billion.

Controversy over reduced revenues to the SSDF

While the proposed regulation aims to create additional resources for the SSDF, a previous decision signed by Erdoğan has led to a decrease in the fund’s revenue.

Turkey announced a 50 percent reduction in taxes on betting and lotteries, effective January 1, 2024.

According to a report by the Sözcü newspaper, the resources transferred to the SSDF from taxes collected on betting and lotteries were halved after the reduction of the taxes.

The move benefitted entities such as Demirören Holding, which owns Turkey’s largest media group and supports Erdoğan, since the group also oversees İddaa, Turkey’s only fixed-odds sports betting game.

Şans Girişim, a subsidiary of Demirören Holding, has been operating İddaa since 2019. Critics argue that the taxes not collected from such companies will now be levied on ordinary citizens.

Sözcü’s calculations indicate that by reducing these taxes, the state’s revenue from taxes on betting and lotteries will have decreased by approximately 33 billion lira — roughly double the amount expected to be collected from the public via credit card contributions.

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