This year the government is counting on a new value added tax (VAT) to bring in some additional LE30 billion in tax revenue. The funds are needed to finance Egypt's budget deficit, which reached 10.8 per cent of GDP in 2014/15. The targeted deficit for the current fiscal year is 8.9 per cent. It is possible to increase the tax revenue on goods and services, as private consumption is growing at a higher annual rate, at 19 per cent, than sales tax revenues at 13 per cent, says Omnia Helmi, director of research at the Egyptian Centre for Economic Studies. Although the application of VAT will necessitate the issuance of a new law, it is in fact simply the second phase of the already existing general sales tax. The application of the new tax is not expected for several months, minister of finance Hani Demian announced last month, and the new law is being debated by stakeholders to ensure its smooth application. The new VAT would apply to all goods and services in Egypt, unlike the current sales tax which is imposed on only some services. It is also levied on all levels of production, unlike the sales tax, which is currently only collected at the retail level. The tax will also be paid by importers. Exports will be exempt from the tax, and exporters may claim a refund for taxes paid on inputs. According to Helmi, there is room for increasing the tax revenue on goods and services in Egypt. In a 2013 study she said that private consumption was growing at a higher annual rate than sales tax revenue, and over the past few years the general sales tax, as a percentage of total tax revenues, has been declining. The suggested new VAT is a unified 10 per cent, unlike the sales tax which ranges from five to 15 per cent depending on the type of product. While the application of the tax is expected to bring about higher prices, price rises should not be high, Helmi says, because the VAT will replace the general sales tax. A 10 per cent rate of VAT would increase consumer prices by nearly one per cent, according to Helmi, who adds that this would likely be a one-time increase in the consumer price level, not an annual occurrence. However, this has not reassured consumers. Samira Mohamed, the mother of four, does not believe the price hikes will come to only one per cent. “Whenever anything out of the ordinary happens, such as new taxes, prices rise. Everything will cost more, and the goods and services providers will blame it on the new tax,” she said. The government needs to clearly state that products affecting the lives of limited-income individuals, be they basic foodstuffs or services, will not be affected by the new tax, said Rafaat Sobhi, a former manager at the Tax Authority. He said that items like sugar, cooking oil or rice, as well as cheap healthcare and educational services, should be totally exempt from the new tax and there should be strict supervision of the market in order to make sure traders do not take advantage of the situation. To avoid alarming the market, some have suggested that no new law be issued and instead that the existing sales tax law be amended to avoid the psychologically negative effect on people expecting a rise in prices. However, Sobhi does not support this idea, saying that a “patched-up sales tax law could prove problematic down the road. It is better to start with a new law.” He would also prefer to see the government unify the tax at 12 per cent. The additional two per cent, he says, would double the revenues expected from the tax to LE60 billion. The new VAT will apply to high-earning services businesses that are not currently being taxed, such as training, consultancy, marketing and even the sale of sports people, he said. It could be a life-saver for the Egyptian economy, he says. Even more important than the actual revenue from the new tax was its advantage in encouraging businesses to formalise, Sobhi said. In order to get a rebate on taxes on inputs, producers, manufacturers and anyone else involved in the value chain will need to have receipts to present to the tax authorities, meaning that they will only be able to use formal suppliers. This will encourage suppliers who may currently be working informally to formalise, Sobhi noted. The new tax will likely decrease the number of businesses that have to register with the tax authorities as it will likely raise the minimum size of businesses that register with the tax authority from around LE150,000 to LE500,000 or 1 million. This is good, Sobhi said, adding that 95 per cent of the revenue from the existing sales tax was from only 5,000 out of around 600,000 businesses. However, the application of the new tax may not be easy and will need proper supervision and an army of tax collectors, says Ashraf Hanna, president of Ashraf Hanna Accounting, Auditing and Tax Consulting. He too believes that the importance of the new tax lies in broadening the tax base because it will tax activities that were not previously taxable. However, he is worried that its application may prove problematic. He said the government would need to make tax rebates quicker, especially for manufacturers who cannot always afford to wait for manufacturing processes to be over before retrieving their tax. For other, non-traditional types of businesses, such as renewable energy production plants, Hanna questioned how they would be able to retrieve the taxes paid on inputs and capital goods when the end service they are selling is currently not taxed. Egypt is not the first country to apply a value added tax. According to a study by Omnia Helmi, 50 years ago VAT was rarely heard of outside France, its homeland, whereas now it is found in over 150 countries where it raises 20 per cent of all tax revenue. She also points out that in 1985 Indonesia introduced VAT, with it swiftly becoming a key source of revenue accounting for 38 per cent of total tax revenues and three per cent of GDP in 2012/13. Indonesia's economy in 1984 when the tax was introduced was similar to Egypt's today. At the time Indonesia exempted several items from the new tax for social and administrative reasons, of which the most important were basic commodities, medical and educational services, and financial and insurance activities.
