The ballooning budget deficit is one of the main concerns regarding the Egyptian economy's health. Tightening the fiscal deficit — the difference between government revenues and expenditures — usually tops reform programmes in countries that acquire International Monetary Fund (IMF) loans and Egypt is no exception. After months of on-off discussions with the IMF, Prime Minister Hisham Kandil's government is currently presenting the fund with the features of a plan aimed at dealing with the woes of the economy for a promised $4.8 billion loan. The plan — whose features are yet unknown, even to IMF stuff, according to The Wall Street Journal, quoting a senior IMF official Sunday — is believed to include cuts in subsidies and other plans to tighten the deficit. Among the plans, analysts expect, are new changes announced late last week in the taxation system. The changes sparked controversy, even among the members of the Freedom and Justice Party (FJP), the Muslim Brotherhood's political arm and leading party in government. “Just thinking about imposing new taxes in a society already suffering from the economic aftermath of the revolution and full of tension due to political changes means one thing; that this government lacks all kinds of political insight,” said Mohamed Gouda, spokesperson of the Economic Committee in the FJP. The changes include adding two new brackets to taxes on individual income. A 22 per cent tax will be levied on individuals with annual incomes between LE1 million and LE10 million, while annual incomes higher than LE10 million will be taxed at a rate of 25 per cent. “Why are we talking about taxes now? It won't even be included in the current tax year, which ends in March,” said Gouda, criticising the fact that the lowest bracket in the tax system imposes taxes on Egyptians whose annual income is LE9,000. “This is absolutely nonsense,” he said, noting that the FJP has previously suggested raising the threshold to LE18,000. Gouda said the government raised the people's anger by making these changes while previously ruling out the possibility of imposing any new taxes. Gouda added that the government did not consult the FJP before announcing its decision. Ashraf Al-Arabi, former head of the Taxes Authority, agrees with Gouda on the bad timing of the changes, which he deems controversial, cosmetic and only capable of yielding meagre revenues. “Take the 22 per cent bracket on individuals realising profits of LE10 million per year. Those individuals are currently asked to pay 20 per cent. The increase means an extra LE180,000, but how many Egyptian individuals — and I repeat, individuals and not corporations — make such profits in a year?” asked Al-Arabi. The changes also include, and for the first time since the early 1990s, a 10 per cent tax to be levied on early transactions on listed shares following their initial public offerings (IPO). Another tax will be imposed on mergers and acquisitions. With the last IPO in the Egyptian market dating to almost two years ago, the proposed tax did not stir much concern. And while Mohamed Mahsoub, minister for parliamentary and legal affairs, said on a nightly talk show Saturday that an additional tax will be imposed on listed shares dividends, the Finance Ministry denied this the following day. According to Reuters, data from Ernst & Young shows that Turkey, Mexico, South Korea and the Netherlands all have zero rates of taxation on capital gains. Instead, these countries levy taxes on income from dividend receipts, a practice that is not implemented in Egypt. “I can't understand the aim behind this new tax. The only tax to make sense on the stock market transaction would have been a capital gains tax on hot money. This would help reduce speculation,” said Amr Al-Alfi, head of research at Mubasher Financial Services. “Even such an important tax should not be imposed now. Not before the vagueness of the political and economic outlook becomes clear,” he added. Investors do not seem to be affected by the news so far, according to Al-Alfi, who points out that the stock exchange closed in the green for three sessions following the announcement. Other changes in the tax system were published in the state-run daily Al-Ahram newspaper Sunday, without citing a source. According to Al-Ahram, the government drafted a law to raise the sales tax on both commodities and services by one per cent to 11 per cent. “I think the one per cent increase is just a testing balloon to see how society would react to further increases, said Al-Arabi, explaining that the one per cent rise would only yield LE750 million per year, which is not worth the controversy the decision is stirring. Moreover, certain items, including passenger cars, cigarettes and tobacco, beer and alcoholic drinks, carbonated mineral water, coffee beans and water-resistant cement will witness larger — but not yet revealed — increases in their sales tax. “Why did they choose these items in particular? For example, why are coffee beans overtaxed now, and at the end of the day how much would it yield? I can't see the logic behind these changes,” said Al-Alfi. Al-Arabi adds that in the case of cigarettes and alcoholic drinks, any new taxes will only lead to more smuggling of less expensive brands, as has been the case since the last tax increase on cigarettes. The proposed changes also include a tax on mobile services of 15 per cent, while an extra LE0.01 per minute would be levied for phone use and the tax on text messages would be increased. “Imposing a LE0.01 tax on each minute in mobile usage means that out of 100 billion minutes, the Tax Authority would get only LE1 billion,” said Al-Arabi. Minister of Finance Momtaz Al-Said did not give an exact date for the implementation of the new taxes. “The law has not yet been drafted, and will be enacted by either the president or parliament if it is formed,” he told Reuters. Among the changes is extending the deadline to pay back taxes to March from December, and giving those who are late in paying their dues a 15 per cent discount, a decision that many observers criticised and described as rewarding the uncommitted. “It is very obvious. They need to introduce reforms that show the IMF Egypt is serious about putting the economy back on track. But it seems there is a lot of blundering within the government about the nature and scope of these reforms,” said Al-Arabi.
The structure of Egypt's new income tax (for individuals) First bracket (LE9,000-LE20,000): 10 per cent Second bracket (LE20,000-LE40,000): 15 per cent Third bracket (LE40,000-LE1 million): 20 per cent Fourth bracket (LE1 million-LE10 million): 22 per cent Fifth bracket (LE10 million and up): 25 per cent
