It will take more than good intentions to implement the latest tax reform proposals, reports Sherine Nasr The National Democratic Party's Policies Committee recommended an overhaul reform of Egypt's tax system last week. The reform scheme -- called the most drastic in three decades by tax experts -- is being viewed as one of a series of tools by which the government is trying to mend the ailing national economy. The proposals include modifications of both the income and sales tax systems with a goal towards improving the country's investment climate by providing substantial tax reductions on all economic activity. By raising the tax exemption ceiling, a great many limited income individuals also stand to benefit from the changes. Anyone making less than LE5,000 annually would be tax exempted, while those earning incomes ranging from LE5,000 to LE20,000 would be taxed at 10 per cent, instead of the current rate of 20 per cent. And whereas those making between LE20,000 and LE40,000 are currently taxed at 42 per cent, that rate should go down to between just 15 and 20 per cent. General Tax Authority head Hosni Gad said that "civil servants have been granted an additional ceiling of LE2,000 in tax free income, making their exemption ceiling LE7,000." Currently, private sector companies are subject to a 10 per cent tax on profits, while joint-venture companies are charged 32 per cent. Under the new scheme, both categories of companies would pay a suggested 20 per cent tax. By raising the tax burden on private sector entities, Gad said, the government's strategy was to facilitate mergers between smaller and larger businesses. A number of tax holiday incentives are also being removed. Joint-venture companies listed on the stock market, for example, will no longer be tax exempted. Cairo University accounting Professor Sayed Abdel-Mowla said it was better for new companies to operate in an open market environment such as the one that currently exists in a number of newly industrialised east European countries as well as several neighbouring Arab countries. "In the past, exaggerated protection of new companies in the form of unjustified tax holidays only helped to create weak entities that have failed to deal with the fierce competition on the international market," he said. Among the most important of the new suggestions is the proposal to reimburse the 10 per cent sales tax on capital goods, a step that has long been called for by Egyptian industrialists. "The ten per cent tax will be paid on export capital goods at the customs authority, and then deducted when the tax payer submits his tax report at the end of the year," said Hassan Abdallah, who heads the Sales Tax Authority's research department. This particular proposal, he said, would be effective immediately since an administrative decree, and not a law, mandates it. Abdallah said the impact on total sales tax revenues would be palpable. "Tax on capital goods contributes a major bulk to the authority's annual revenues," he said. The authority will probably make up for this by broadening the overall platform of taxpayers via the inclusion of more services and economic activities. Another major plan is to announce a unified 10 per cent sales tax on all commodities and services, to replace the current structure involving a five, 10, 25 and 45 per cent tax on different commodities. "This will be a major step towards simplifying the application of the tax on all categories," Abdallah said. Authorities are also considering removing sales taxes altogether on industrial inputs used in products to be exported, as well as on intermediate and final goods with an aim to encouraging local industry. Other plans include establishing an arbitration committee, composed of Justice Ministry officials, which would settle disputes, and provide clear and articulate descriptions of both tax evasion cases, and those involving mere delays in paying taxes. The goal would be to set down harsher penalties for evasion. Another aim is to grant small and medium-sized enterprises (SMEs) a tax pardon if they register with the authority. Although all these major changes are meant to have a positive impact on the tax system overall, they do mean that the overall state revenue from taxes will go down for the next few years at least. "In 2003, sales taxes contributed some LE21.6 billion to the government's coffers. Sales tax revenues may drop by LE3.6 billion due to the latest proposed reductions and pardons," Gad said. The aim is to make up for the potential losses by incorporating a wider number of professions and services to the sales tax. "We are studying the possibility of imposing sales taxes on doctors, teachers, lawyers, hair dressers and other professions in order to make up for the decreasing revenues," Gad said. The Egyptian Businessmen's Association (EBA) said the plans, as proposed, would definitely help revive the market. According to EBA head Gamal El- Nazir, "the proposed ideas will have a positive impact not only on businessmen but on consumers as well." Tax experts, however, remained sceptical about the government's ability to carry out all these major changes. They also believe that the government has poorly calculated the impact of the proposed reductions and exemptions. "Reducing the tax is a good step in and of itself. However, I doubt that the government has a clear estimate of revenues after the reductions are imposed, nor does it have a clear vision of how it will make up for the drop in revenues," Abdel-Mowla said. He also underlined that the tax plans were announced immediately after the latest reductions in the custom fees, "which will cause custom revenues to drop by approximately 25 per cent for 2004 compared to 2003". These potential hiccups did not mean that the "new plans should be rejected altogether", he said, "but that the government should think of practical ways to build bridges of trust between tax payers and tax authorities".
