Egypt's parliament approved the long-delayed value added tax (VAT) on Sunday at a rate of 13 per cent, but this will rise to 14 per cent next year. The government and the parliament had been at loggerheads concerning the rate of the new tax, with the government insisting on a 14 per cent rate, while MPs had been holding out for 12 per cent. The draft law has also been long in the making. The government had originally been counting on implementing it in the 2015-16 fiscal year. The new VAT is scheduled to be implemented this month. Its introduction is believed to be one of several measures taken by the government in order to qualify for a $12 billion loan from the International Monetary Fund (IMF) over three years. It is also part of the government's fiscal reform programme, implemented from July 2014, through which energy subsidies are being cut and new taxes introduced to reduce the country's ballooning budget deficit. This reached 11.5 per cent of GDP in the last fiscal year, with the government wanting to bring it down to 9.8 per cent. The new VAT aims to make tax evasion difficult, as it will be applied to each part of the production chain of goods and services to the final retail stage, instead of the current 10 per cent sales tax that is imposed as a one-off tax on final sales to customers. The VAT that the consumer pays when a product comes onto the market will apply to the cost of the product, minus the cost of the components in it that have already been taxed. Amr Al-Moneir, deputy minister of finance for taxation, said in a press statement this week that a 14 per cent VAT rate would bring in some LE32 billion in additional revenues to government coffers. These will be spent on subsidising foodstuffs and funding the Takaful and Karama welfare programmes to increase their beneficiaries to the country's poorest villages. Takaful and Karama are cash transfer programmes directed towards more vulnerable groups such as the elderly, disabled, and families with children living in poverty. Al-Moneir added that the revenues would also boost social security programmes and rein in the budget deficit by one per cent. The draft VAT law was highly controversial, however, and its passage was delayed as MPs were not able to reach agreement, especially on setting the rate at 14 per cent. While the government wanted the tax to be levied at 14 per cent to help close the budget deficit, a large number of MPs wanted it to stand at between 10 and 12 per cent out of fears of the public backlash the new tax could cause. There have been particular worries about additional inflation, already at a seven-year high of above 14.8 per cent in July. Finance Minister Amr Al-Garhi said that the inflationary effects of the new VAT should not exceed an average of 1.3 per cent, adding that for most products the same tax rate would be applied with no additional burden on consumers. Food items exempt from the sales tax would also be exempt from VAT, meaning that the cost of basic needs should not be affected, the minister said. The new VAT has a very long exemption list that contains 56 items, including infant formula and other dairy products, bread of all kinds, pasta, meat, poultry, fish, unprocessed and processed agricultural products as well as fruit and vegetables (except potatoes), juices and concentrates, pulses, cereals, table salt and spices. Raw petroleum and mineral products, including crude oil and natural gas, among others, are also exempted. However, recent papers on the new VAT by the Egyptian Initative for Personal Rights (EIPR) and the Egyptian Centre for Economic and Social Rights (ECESR), NGOs, raise concerns about the tax's effect on the country's poor and the price increases that could come along with the implementation of the new tax. The EIPR expressed concerns that the new VAT would lead to an increase in prices in the light of monopolistic practices in various sectors and the fall in the value of the Egyptian pound against the dollar, now at an all-time low of LE13 on the black market, with expectations of further devaluation as a condition of the IMF loan. The paper said the VAT might stifle consumption and thus growth and job creation, leading to a recession, especially at a time when inflation is high and growth is slow. It also raises concerns regarding loopholes in the VAT law which could open the door for corruption, such as giving authority to the finance minister and the head of the Customs Authority to make exemptions. The law also gives the finance minister the right to spend LE2 billion annually with the aim of “encouraging investors” without any conditions on the spending. In order to mitigate the effects of the new law, the paper recommends that the government accompany the new VAT with a bundle of other taxes, such as wealth and capital gains taxes, in a way that would ensure greater social justice. The same concerns were highlighted in the ECESR paper. It says that the new tax comes at an inopportune time when Egyptians are already suffering from the falling value of the Egyptian pound and high inflation and unemployment rates as a result of the slowing growth rate. The new VAT is an additional threat to purchasing power, it says. The paper says that the government has ignored the effects of the new tax on economic growth, saying that increasing consumer taxes leads to a significant decline in consumption as a result of increasing burdens on consumers. “The implementation of the new tax will have a sharply negative effect on already faltering economic growth,” the ESESR said. The paper said that consumer taxes were a “double-edged sword” that brought an increase in tax revenues in the short term, while negatively impacting the economy and consumers in the medium and long terms. It added that depending on the tax to curb the budget deficit was “an unsustainable solution to a structural problem in the Egyptian economy.”
