More revenues, less hassle

Bashers of the government's plan to implement the final phases of the sales tax say it is likely to exacerbate the market slowdown. Head of the Sales Tax Authority explains to Niveen Wahish why he thinks otherwise
The government's recent request to parliament for the application of the remaining two phases of the General Sales Tax, which were originally scheduled to be enforced in 1993, has been subject to widespread debate. The government has said the law poses no additional burden on either the distributor or the consumer, but may, in fact, revitalise the economy.
In 1991, the Egyptian government introduced a five to 10 per cent general sales tax, modelled after the value added tax levied in various parts of the world. However, at that time, the government decided to adopt a gradual three-phase implementation of the new tax. In the first phase, it levied the tax only on producers, importers and service providers, postponing its application to wholesale traders and retailers to a second and third phase.
Mahmoud Mohamed Ali, head of the Sales Tax Authority, spoke to Al-Ahram Weekly about the current controversy and what the application of the final two phases means.
Since the last two phases of the 1991 law have not yet been applied, is the law's administration thus incomplete?
No. The law issued in 1991 is complete. It regulates the entire sales tax collection process at all stages, but includes a clause stipulating that the collection of the tax is limited, in the first stage, to the producer, importer and service provider. It postpones the application of the law to the two categories of distributors -- wholesale traders and retailers -- until a later stage.
Why were these two stages delayed?
The postponement was for the sake of preparing both society and the tax authority for full implementation of the system. At that time, the authority did not have the expertise to deal with the huge number of traders. The number of employees was insufficient and there was no computerisation yet. Moreover, we wanted to make sure that the business community was better organised, meaning that they were able to keep registers and ledgers and issue tax receipts.
Does parliament's approval of the application of the two last phases mean that the 1991 law may be modified?
No. When the law came out in 1991, it stipulated that moving on to the application of the second and third phases of the law would take place by presidential decree, which means it is only a procedure, not a new tax. However, the president saw that for the sake of transparency and in order to increase public awareness, the approval should pass through parliament.
What will the application of the second and third phases entail?
With the application of the last two phases, wholesale traders and retailers will be required to pay the government the difference between the tax the consumer paid for the product and the tax they paid to the producer. The distributor would not be paying the tax out of his own pocket, he will be putting it on the consumer's bill. The consumer has actually been paying this tax indirectly since 1991. The only difference now is that the tax amount will be clearly shown on consumer bills
Could you give us an example of how it works mathematically?
Suppose a distributor buys a product at LE100 from the producer and pays him a 10 per cent tax amounting to LE10. When he sells this product to a consumer, he adds LE10 as his profit and sells it at LE110. The consumer would then be paying the price of the product (LE110) in addition to the 10 per cent sales tax which comes to LE11, thus bringing the price of the product to LE121. The difference between the price of the product (LE110) and the price the consumer paid (LE121) is the LE11 tax. Of the LE11 tax collected, the distributor will keep LE10, which he paid to the producer when he first bought the product, and the remaining LE1 will be delivered to the government.
You have been quoted as saying that the application of the second and third phases of the tax will eventually reduce commodity prices. How would that happen?
Prices should go down in the long run because the taxes currently included in the cost of production input may be refunded by producers if they buy them from a registered distributor. The distributor has to give the producer a receipt stating the price of the commodity and the due tax. The producer needs the receipt to refund the taxes paid on production input. Producers could thus cut down their production cost, create a bigger market for their products and increase demand. This ought to revitalise the market and help solve the current economic slowdown.
Not only will production costs go down, but this will also mean better business for distributors. Before, producers preferred buying their input material from other producers no matter what kind of hassle they have to go through, because they could give them a tax receipt.
Now the producer will be more inclined to buy his input from a nearby registered distributor because he could be given a better deal.
How often is the tax collected?
The money is collected two months after a transaction.
Which products are subject to the tax?
Only industrial products are subject to the tax, leaving around 60 per cent of products on the market not liable to it. Agricultural products, processed agricultural products, meat and fish, for example, are exempt from the tax. And only 16 per cent of total products will be affected by the transition to the second and third phases.
What did the first phase bring in revenue and how much is the application of the two new phases expected to add?
In 1999/2000, the sales tax revenue was LE16.8 billion. In 2000/2001, the expected revenue is LE18 billion. The second and third phase are expected to bring in an additional LE1.5 billion.
The sales tax replaced the consumption tax, previously applied to 124 products at various rates. The revenue from the consumption tax in 1991, just before the application of the sales tax, amounted to only LE2.4 billion.
How does Egypt's sales tax compare to other countries'?
It is among the lowest worldwide. Egypt's rate is similar to that of France.
Was there any coordination with the business community?
Yes, we did coordinate. Producers and distributors are part of the tax collection system. Therefore, the authority would never leave them in the dark. There will be a year-long period to allow for things to fall into place. We will also attach technical committees to the federations and divisions of chambers of commerce to guide people.
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