Egypt's new finance minister does not seem optimistic about the country's budget deficit or the economy's growth rates. Talking to reporters last week, Hany Kadry revised downward his predecessor's economic growth predictions for the current fiscal year, putting it at around two to 2.5 per cent. Moreover, he predicted that the deficit, standing at a record high of 13.7 per cent last year, would stay high at 12 per cent. Despite the inflows of Gulf aid in recent months, the previous government's social-friendly moves have been putting strains on the budget. The state's wage bill has increased by nearly 120 per cent over the last three years, and in addition to increasing the minimum wage to LE1,200, the government has also upped social solidarity pensions by 50 per cent. Moreover, the new constitution, ratified in January, increases spending to three per cent of GDP for health, four per cent for education and one per cent for scientific research. The overall increase is estimated at tens of billions. In such situations, the usual approach would be to increase revenues by boosting taxes. During the same meeting, Kadry revealed plans to impose a new five per cent tax on individuals whose annual income exceeds LE1 million. The new tax is temporary and is expected to last for two to three years. According to experts, a tax of this sort was imposed after the 1967 War on people of high net worth. “There is not enough data on the new tax and thus its efficacy cannot be accurately estimated,” said Ashraf Al-Araby, former head of the Egyptian Tax Authority. According to Al-Araby, it is unclear if the tax will be imposed only on Egyptians living in Egypt or whether it will also be levied on expatriates. Speculation about collecting taxes from Egyptian expatriates has raised reservations during the last two weeks for fear that they might affect remittances, one of Egypt's main sources of hard currency. Moreover, opponents say that by living abroad expatriates do not make use of the services financed by local taxpayers. “This is a misconception. We have many families where the father or the main bread winner works abroad and all his family lives here,” Al-Araby said. “This is a temporary situation aiming at supporting the budget and all Egyptians should participate,” he added. The fact that companies have been excluded from the new tax base does not make sense to many experts. Al-Araby said that this might stem from the fact that taxes on corporates in Egypt are already high compared to neighbouring countries. “In 2004, when the then minister of finance Youssef Boutros Ghali slashed taxes by half to 20 per cent, most of the Arab countries followed suit, so when we increased them to 25 per cent last year we became the highest taxer in the region,” he explained. Kadry did not give an estimate for the expected revenues from the new tax, but Al-Araby said that only a tax with revenues hovering around LE20 billion would make a change to the deficit. “To reach such a level, the taxable income should include all kinds of income, including gains from selling assets,” he said. When imposed, the tax brackets will increase. Currently, the highest rate is 25 per cent on those earning more than LE250,000 per year. Now those earning more than one million will pay 30 per cent in tax. While tax revenues in the first six months of the current fiscal year came in at 19 per cent higher than the year before at LE80.3 billion, tax revenues in Egypt, standing at 17 per cent of GDP, are still low compared to other countries. According to speakers at a recent debate organised by the Arab Network for Media Support, this level reaches 89 per cent in the EU and 25 per cent in Turkey and Morocco. However, the space to impose new taxes or increase the current rates is narrow. The last two governments tried to replace the sales tax by a value added tax (VAT), which is fairer and will yield more money. The inflated figures of the sales tax in the current year's budget were read by many as an indication that the government will now levy a 12 per cent VAT rate instead of the 10 per cent across-the-board sales tax. But “almost 85 per cent of the VAT rules are applied through the current sales tax. The remaining 15 per cent is related to taking more taxes from professionals like doctors,” noted Al-Araby. “The income of the latter category of taxpayers is very hard to calculate, and their contribution compared to the overall tax revenues is marginal. Thus the yield from transferring to VAT won't be much,” he added. The same problem of meagre expected revenues applies to the long prepared-for property tax. “The property tax in its current shape is a fiasco,” Al-Araby commented. According to the law, single house owners are exempted from the tax, as are properties of a value up to LE2 million. “There is no country in the world that exempts private residents from taxes, and if those who can afford to buy houses at LE2 million are exempted, who should be taxed instead,” he asked. The collection of the property tax won't be cost effective either, he said. “While it is expected to yield LE2 billion, the cost of collecting it, including the huge salaries of the 60,000 real estate tax authority personnel, will not be less than LE1 billion.” While he did not elaborate, Kadry last week said that the property tax was being subjected to final adjustments so that tax brackets, rather than the tax rate, would be revised every five years. Around 50 per cent of the property tax revenues will be directed to developing informal housing areas and poorer areas, according to the ministry of finance. Even aside from revenues, the structure of the Egyptian tax system has long been criticised for not being fair. The fact that almost 46 per cent of overall tax revenues come from indirect taxes, taxes levied on goods and services rather than on income or profits, undermines the fairness of the system, according to Ahmed Al-Naggar, an economic expert and coauthor of the Strategic Economic Trends report. On top of these indirect taxes is the sales tax which is mainly shouldered by low and middle-income people, as they represent the largest chunk of the users of services or buyers of commodities. Sales tax revenue is projected at LE126 billion in the current year's budget, representing more than 35 per cent of overall expected revenues. According to Al-Naggar, based on the budget figures, sales taxes paid for by in-need categories of the population and the income tax levied on wage earners surpass the taxes paid by corporates in the form of income taxes and customs duties. The government increased the minimum taxable income to LE12,000 in 2013, a move that was boasted of by the finance minister but is seen by Al-Naggar as falling short of making the government's ends meet. “In 2005, the minimum taxable income was set at LE9,000. If the inflation rate during the eight year following had been considered, the government should have raised the figure to LE20,000,” he noted. Both Al-Naggar and Al-Araby have called for imposing taxes on stock market transactions, a plan that was scrapped two years ago after it faced stark opposition. “Why are we exempting those buying and selling shares from taxes? Securities should be treated like all kinds of taxable commodities,” Al-Araby said. Increasing customs could also be a way out. The value of customs revenues in the budget is LE21.6 billion, which puts the average customs duty at five per cent. “Egypt's obligations to the World Trade Organisation give it more space to increase its customs duties,” Al-Naggar said. Al-Araby had another suggestion. “We have to be practical: the only way out is increasing the value of the sales taxes to around 12-14 per cent,” he said. But he noted that in the light of the already high inflation rates, such a move could stir social unrest.
