In its first visit to Egypt since the 30 June Revolution, an International Monetary Fund (IMF) mission arrived in the country last week for a three-day visit aiming not to renegotiate the terms of the $4.8 billion loan that Egypt has been trying to acquire since late 2011, but to extend technical support for the application of the value added tax (VAT) that will replace the current sales tax. Government officials have been pointing to the introduction of VAT as an urgent need, with Finance Minister Ahmed Galal saying during his meeting with the IMF delegation that the introduction of VAT would lead to a fairer distribution of taxes, increased revenues, and a boost for businesses. Egypt has had a sales tax since the 1990s, but according to tax experts the Egyptian version mixes features of a regular sales tax and VAT. While a sales tax is collected on retail sales and only the final sale in the supply chain is subject to the tax, VAT is imposed on each stage of the supply chain. This means that at the moment the sales tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With VAT, on the other hand, collection, remittance to the government, and credit for tax already paid occur each time a business in the supply chain purchases products. A sales tax is generally imposed on the sale of tangible goods and selected services, while VAT is generally imposed on the sale of all goods and services. For business-to-consumer sales, VAT is typically included in the price that the consumer pays and is often not visible to the purchaser. A sales tax, on the other hand, is separately stated on invoices to the customer. VAT also avoids the surge effect of a sales tax by taxing only the value added at each stage of production. For this reason, VAT has been gaining favour over traditional sales taxes. The Egyptian Tax Authority (ETA) has completed the preparation of a draft law for the transition from the sales tax to VAT, according to recent statements by its head, Mamdouh Omar. It had been suggested earlier that the VAT should be structured under a single 10 per cent rate, replacing sales tax rates that have ranged between five and 45 per cent. It is expected that the new VAT tax will lead to an increase in the tax proceeds collected by the state. But tax experts say that the introduction of VAT will not increase fiscal revenues significantly immediately after its implementation. Ashraf Al-Arabi, former head of the Egyptian Tax Authority, said that the sales tax had been imposed on most sectors, commodities and services since the 1990s, when the sales tax was applied in stages. He was not in favour of the introduction of VAT at present, since there was already a functioning sales tax. The new tax would also be levied on the services offered by professionals like doctors, accountants and lawyers. Al-Arabi said that the benefits of introducing VAT were unlikely to be as high as government expectations, as self-employed professionals' taxes were calculated according to their reporting, which may or may not be accurate. “Income-type taxes levied on the self-employed are usually disappointing and hard to scrutinise,” Al-Arabi said. He added that the main aim of imposing any new tax was to increase state revenues and therefore decrease the budget deficit. “If the government directed its efforts to regulating and legalising the informal economy, I believe the tax revenues would be enormous,” he said. “If the government succeeded in changing the informal economy into a formal one, the revenues could be close to the LE120 billion that are collected in taxes today.” Al-Arabi said that in his opinion amending the tax laws, increasing the value of taxes, or imposing VAT instead of the sales tax would not bridge the gap in the budget deficit. However, the government is enthusiastic about the new tax, which is expected to come into effect at the beginning of next year. Reham El Desoki, senior economist, said that the VAT could be applied to a number of commodities and services, mainly services that are currently not fully taxed, such as those provided by doctors, lawyers, accountants, carpenters, plumbers and the like. The application of the new value added tax would probably be accompanied by inflationary pressures that could emanate from a rise in the prices of goods and services whether the tax will be applied to them or not due to rent seeking behaviour in society. However, if the government intended to apply the VAT tax at the beginning of next year, this was “not bad timing,” she said, as “the first quarter of the year usually lacks the inflationary pressures of other quarters, which may have pressures such as Ramadan or back-to-school seasons to contend with.” Egypt's inflation rate exceeded 10 per cent in September after softening to 9.7 per cent in August. But she noted that for the application of the new tax to go smoothly, it depends at the end on a number of circumstances, including whether other market related issues could coincide, like energy products supply, the prices of crops and food commodities and application of wage changes at the time. El Desoki pointed out that January 2014 will also witness, according to the government announcements, the application of the minimum payment. 2014 could also witness the restructuring of energy prices, especially for energy intensive industries, such as cement, steel and fertilizers. “these factors, combined, will have an impact on prices and markets,” she said. Regarding the immediate impact of the new tax, Reda Eissa, an independent economist and a member of the Citizens Against Price Rises Association (CAPRA), said that the sales tax and the new VAT tax or any other form of indirect tax were generally burdens to be borne by consumers. “The patience of Egyptian consumers has been stretched with the unprecedented price hikes and the surge in the inflation figures. It is not fair to keep burdening people with these things, especially amid all the talk of social justice,” he said. “If the aim of imposing the new tax is to maximise tax revenues, the government should consider applying progressive taxes instead, or chasing tax evaders,” he added. Eissa said that the average Egyptian citizen paid 28 per cent of his income in taxes, whereas companies paid only 13 per cent on their profits. The government is hoping to raise an additional LE322 billion in tax revenues as part of the 2013/2014 budget, an Egyptian Tax Authority official said.
