The draft sales tax law is in need of fine tuning, reports Sherine Nasr Continuing its overhaul of the tax system, the Ministry of Finance last week unveiled the draft of a new sales tax law to be presented during the next session of the People's Assembly. Together with July's income law, the new legislation will help form the basis of the government's long-promised redrawing of Egypt's tax regime. The new legislation is expected to spark heated debate in the People's Assembly, and is already the subject of controversy among tax experts. "The final legislation is likely to differ from the draft on a number of issues," says Raafat Sobhi, from the Sales Tax Department of United Accountants, one of Egypt's largest accountancy firms. "But whatever the changes eventually made, the new legislation signals a shift in the underlying philosophy of the tax regime. "Currently sales tax is imposed at different stages of the selling process which leads to duplication and leaves the system open to abuse," Sobhi asserts. The shift to a more streamlined form of Value Added Tax (VAT) should, added Sobhi, allow any taxes paid on production inputs through the tax year to be reclaimed, eradicating duplicate payments. The new legislation also attempts to maximise tax revenues by broadening the base of those obliged to pay sales tax. Some 27 service providers -- including shipping, transport companies, hotels and restaurants -- now pay the tax. Under the draft law they will be joined by accountants, social clubs, private hospitals and schools. Plumbers, tailors, carpenters, mechanics and physicians will also fall under the new regime. Currently the number of sales tax payers registered at the authority are estimated at half a million who generated an estimated LE24 million in the last tax year. The draft law will see a four-fold increase in the number of taxpayers, to two million, though experts question whether this will be accompanied by any significant increase in revenues. "While the plan is to double tax revenues, this might not be the best way to do it," says Sobhi. "It will increase the tax burden on low and middle income families without significantly raising overall tax revenues." It will also, he believes, stretch the resources of the tax authorities to breaking point as they attempt to identify those who should be paying the tax. The present law sets a threshold of LE150,000 for traders (wholesalers and retailers), and LE54,000 for producers (manufacturers) and service providers, before the tax kicks in. This, say experts, should be raised to LE200,000 so as to exclude low and medium income service providers from being caught up in the sales tax net. The deterioration in public healthcare and education has forced many middle income families to resort to the private sector. It would be unfair, says Sobhi, to now tax them for doing so. The draft law has also been criticised as lacking in clarity, particularly when it comes to entities that will remain exempt from its provisions. Identifying exemptions -- they currently extend to all army and police activities -- is a ministerial prerogative, a far cry from the ideal situation, argue many. "We would have loved to see a legal basis for exemptions," says Sobhi. Even those items that are specified for exemption are subject to confusion. While medicines are exempt from the tax, for instance, products classified as nutritional supplements are not. "There needs to be much clearer criteria if the legislation is not to result in confusion, among both tax collectors and the 35 drug companies operating in Egypt," believes Sobhi. And while meat, cheese and butter are currently tax-free, under the proposed law any processed items will be subject to tax. This will lead to a situation in which minced meat, for example, is taxed, while steak is not. In its current form many experts think the new law will unfairly impact on those living on lower incomes, something that the exemption of bread and cooking oil from taxation is unlikely to remedy.
