Driven beyond the law?

Beyond proving expensive for gold dealers, the new sales taxes are undermining time-honoured ways of conducting business, writes Sherine Nasr
In protest against the application of the second and third phases of the sales tax, goldsmiths and gold dealers have kept their doors shut since the taxes came into effect 1 July. And they say things will remain that way until they reach an agreement with the Tax Authority on numerous points of contention concerning the taxes.
Although gold dealers held numerous and extensive discussions with the Tax Authority about the tariffs, they say that their concerns went unheeded.
Most gold dealers are sticking to the three- week-old strike, although a few have opened claiming to have been subject to veiled threats that the Emergency Law will be used against them if they participate in the action.
According to the second and third phases of the sales tax, one per cent of the value of a kilogramme of gold is due as a tax. "A kilogramme of gold is sold for LE32,000. This means that a gold dealer is required to pay some LE320 for each kilogramme of gold he sells; this is simply ridiculous," said Fawzi Fakhri, a gold dealer for the past 30 years.
This new tax, say traders, is inappropriate for the particular nature of transactions common in the market. Such a tax implies that gold is always exchanged for money, which, say dealers, is hardly the case.
According to Fakhri, a gold dealer typically operates as follows: he exchanges a kilogramme-worth of old gold items for an equal amount of newly-crafted ones in addition to LE150-200. "For the craftsman this is not the net profit because this sum is already burdened with a stamping fee as well as the sales tax of the first phase in effect on gold since 1991. Why should the tax imposed on a kilogramme of gold exceed a dealer's net profit for selling that same amount of gold?" he asked.
The first phase of the sales tax alone is a substantial burden at LE1,000 on a kilogramme. Goldsmiths interpret the final phases of the sales tax as being applicable on the value added by the craft process alone. "Gold is simply the material with which we operate. Why has the government imposed taxes on this instead of the profits?" exclaimed Maher Messiha, a goldsmith.
Because gold is a non-perishable material that is often recycled dozens of times, it is easy to imagine that the same tax might be imposed repeatedly on a single piece of gold.
People in the trade question whether gold should even be treated as a commercial commodity. "Gold is used as a substitute for money. For this reason, it should be treated as tax free," said Messiha.
In fact, many gold dealers are contesting the legality of the application of the sales tax on gold with the courts, and although rulings were returned in their favour, these have not been implemented.
Further, gold dealers were promised that the validity of the 40 per cent tax they pay under the Unified Income Tax would be reviewed before any more taxes were levied. "This did not happen. It is hard to figure how to operate in such circumstances," said Messiha.
The second and third phases also require conducting business in a new way. Under these, gold dealers must record each transaction they make towards compiling a comprehensive record of their dealings for each fiscal year. "This is another technical obstacle that will hinder dealers. Practically speaking, it is a far- fetched idea," commented Fakhri. He explained that dozens of selling and buying transactions are carried out among retail and wholesale gold dealers each day, but none keeps records of any of these. "Trust is the one rule that governs us all. Unfortunately, the authority has no understanding of the nature of this market. For its own ends, the Tax Authority is trying to impose regulations. But the practices it would impose are uncommon [in the gold trade], and even unrealistic for such a dynamic market," said Fakhri.
Ironically, the sales tax is collected on gold items that are damaged in the process of testing the quality of the gold at the Stamping Authority. Such items are not sold but rather reworked and then retaxed.
But gold dealers' grievances do not end there. "Since the implementation of the sales tax began in 1991, there have not been clear terms with regard to reimbursing taxes paid on gold items that have not been sold for any reason," said Messiha. Messiha claims that since 1991, the Sales Tax Authority has owed his factory some LE200,000 per year in rebates on the taxes it collected on gold items that were not sold. "This situation has led many gold workshops to forge the Stamping Authority's mark."
Meanwhile, the strike has hurt goldsmiths whose workshops have remained virtually idle for the past three weeks. "We have sustained great losses," said Antoune Raouf, owner of a large gold workshop. A large gold factory employs at least 35 persons each of whose weekly wages range from LE100-250, according to their experience. "That is almost LE7,000 in losses per week," he said.
Traditionally, large workshops contract smaller workshops to carry out certain steps in the craft process, meaning that the smaller workshops have been dealt a major blow as well.
As the gold trade faces an uncertain future some dealers are considering a career change. Already a few have liquidated their holdings in preparation for starting another type of business. "The application of the first phase of the sales tax forced many goldsmiths to resort to cheating on their taxes. With the application of the second and third phases, gold dealers, too, will fake their transaction records. I'm afraid this will ultimately ruin a once respectable, age-old profession," concluded Fakhri.
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