No sooner had parliament started discussing the new value added tax (VAT) last week than people began to speculate how much higher prices would go as a result. Smokers were the first to feel the brunt of the speculation, with some kiosks hoarding cigarettes in the hope of selling them at a higher price when the VAT goes into effect. The new law will replace Egypt's existing sales tax. The draft law, currently being discussed in the Budgetary and Planning Committee of parliament, has been long in the making. The government had originally been counting on implementing it in the 2015-16 fiscal year, but is now hoping to get it approved and ready for application in the current 2016-17 fiscal year. It estimates that the new law could bring in some LE30 billion in additional revenues to government coffers, equivalent to one per cent of GDP. The government needs to increase its revenues to fill a gaping budget deficit which reached 11.5 per cent of GDP in the last fiscal year, wanting to bring it down to 9.8 per cent. The VAT, the government said, should not be considered as a new tax and instead should be seen as a development of the sales tax which has been in place since the early 1990s. The new tax would apply to all goods and services in Egypt, unlike the current sales tax which is imposed on only some services. It will also be levied on all levels of production, unlike the sales tax which is currently only collected at the retail level and is paid by the consumer. If properly applied, the new tax should not result in price increases and should mean that consumers will pay a lower rate of tax. In the past, tax could only be collected from consumers when they bought goods or services, but the new tax allows for collection at each stage of providing goods or services. The draft law proposes a 14 per cent tax rate instead of the 10 per cent rate of the existing sales tax. The inflationary effect of the new tax should not exceed an average of 1.3 per cent, the minister of finance has said. However, it comes at an inopportune time, with the dollar rate against the pound hitting an all-time high of LE13 on the black market. Inflation, too, is at a seven-year high, reaching above 14 per cent in June. But the minister said that for most products the same tax rate would be applied as before with no additional burden on consumers. Food items exempt from the sales tax would also be exempt from VAT, he said, meaning that the cost of basic needs should not be affected. However, many consumers are still worried. “Just the idea of a new tax will have retailers upping their prices,” said Mohga Abdullah, a Cairo housewife. Allen Sandeep, head of research at investment bank Naeem, also expects inflation to pick up, but the extent will depend on the final rate of the new tax agreed upon by parliament. He believes that the government is well aware of the potentially inflationary effect of the new tax because it has focused on the social impact of VAT and how much it could affect the poorer segments of society. While the direct effects may be what the Ministry of Finance estimate, the indirect effects will be unpredictable and will depend on the supply chain and what increases the retailers put on price tags, he said. Members of the Federation of Egyptian Industries (FEI) met with MPs on Tuesday to discuss the new tax. Two main issues were raised, according to Mohamed Al-Bahei, head of the taxation committee at the FEI, and there were calls for the VAT not to exceed 10 per cent. “Each one per cent increase will mean a drop in revenues,” he told Al-Ahram Weekly. “Those who evaded the 10 per cent tax will not pay the 14 per cent tax,” he said. Tax experts believe that less will mean more in this case and that a lower tax rate will encourage people to pay and limit evasion. In 2005, the former minister of finance cut the personal and corporate income tax rate to a flat rate of 20 per cent, and this resulted in tax revenues going from six to 10 per cent of GDP, according to a study by the Egyptian Centre for Economic Studies, a think tank. Another issue that the FEI has been lobbying for is no increase in the minimum size of businesses registered with the Tax Authority. This currently stands at LE54,000 in turnover for industries and LE150,000 for commercial businesses. The draft law proposes raising this to LE500,000. However, Al-Bahei estimates that the Authority could lose 130,000 currently registered businesses as a result and they would not be subject to the new tax. “We are pushing them towards the informal sector at a time when the government is trying to attract informal businesses to formalise,” he said. Al-Bahei supports the new tax, though he said that the rates on various goods need to be revisited. For example, pharmaceutical products should not be subject to two rates, he said, explaining that domestically produced pharmaceuticals are currently subject to five per cent sales tax while imported pharmaceuticals are subject to a 1.6 per cent tax rate. Other products such as cosmetics will be taxed at 25 per cent. “It is not logical that the government still considers cosmetics to be a luxury,” Al-Bahei said, adding that it was pushing consumers towards informal cosmetics makers who could use possibly harmful raw materials. The VAT is likely to be one of several measures taken by the government in order to qualify for a loan from the International Monetary Fund. It was recently reported that it has begun informal discussions to acquire a $7 billion loan from the IMF, allowing Egypt to sign up for equal amounts from ancillary institutions as a result. An IMF loan would give confidence to other institutions to lend to Egypt because it would show that the country had a clear reform programme. A loan agreement signed with the World Bank earlier this year for $1 billion stated that the Bank could withhold the loan if the VAT was not applied. The VAT is an indicator showing the IMF and World Bank that the government is serious about reform, Sandeep said. The government is “walking on thin ice, given the possible social impact of these measures,” he said, adding that it is in a tough spot where it needs to strike a balance between austerity measures while also looking out for the poor.
