A wide range of businesses are reeling from hastily imposed tax hikes designed to bail the government out of a cash crunch, writes Sherine Nasr Tempers are flaring over new taxes, particularly in the tourism and car industries which experts say are already struggling to survive in a competitive market. Earlier this month, the government pushed through three pieces of legislation that added additional taxation on a number of services and products. The legislation came within a package of other policies aimed at increasing state revenues and containing a mushrooming budget deficit that has reached LE52.4 billion. The business community's at times angry reaction to the taxes is in part because no advance notification was made. A development tax ranging between three to 8.5 per cent has been imposed on locally manufactured goods as well as car exports in proportion with engine capacity. According to Abdel-Fattah El-Gebali, counselor to the minister of finance, a three per cent development tax is now imposed on locally manufactured cars ranging from 1000 to 1600cc, five per cent on cars from 1600 to 2000cc and 8.5 per cent on cars above 2000cc. In the meantime, sales taxes ranging from five to 10 per cent have been imposed on tourism-related services including buses, hotels and restaurants. Also, a sales tax increase of 10 to 15 per cent is now imposed on local and international phone calls, faxes and telegrammes. "The target is to increase the annual revenues by LE1 billion," said El-Gebali. In the tourism sector, the Egyptian Hotel Association was quick to react. An emergency general assembly was held on 9 June and attended by 120 representatives of hotels all over Egypt to discuss how to mitigate the negative impact this abrupt decision may have on hotels in particular and on the tourist sector in general. During the meeting it was agreed that hotels would bear the five per cent increase in sales tax from their profits for the period 23 May to 31 October. "According to the EU laws, it is imperative to notify tour operators of any price increases 120 days in advance," said association Chairman Fathi Nour, adding that the increase occurred at a time when other more competitive tourist destinations have further decreased their rates with an aim to attract more tourists. However, it was not the increase in itself but rather the fashion in which it was imposed that evoked many angry reactions in the tourist sector. According to Ulrich Huth, general manager of the Marriott Hotel, while a five to 10 per cent increase in sales tax is not a big problem, "what is unforgivable is that the decision was taken and made effective in 24 hours time. We absolutely had no chance to prepare ourselves or to pass it on to the tour operators abroad," said Huth. He added that hotels, like every other tourist establishment in Egypt, have signed contracts until next October, the beginning of the new tourist season. "Until that time we cannot introduce any price changes to the contracts we've already signed," said Huth adding that there is nothing the hotel can do except deduct the taxes from profits until next October, when the new rate can be reported to tour operators. Huth also referred to the exaggerated taxes imposed on wedding ceremonies held in hotels. According to him, a 15 per cent sales tax is imposed on the first LE15,000 of costs, 30 per cent on the second 15,000 and 40 per cent on costs above LE30,000. "That is already a lot of money. This decision needs a second thought and the margin of taxation should be enlarged to at least LE50,000," he said. Convinced that Egypt is still a cheap destination, Huth dismissed the idea that the latest increase in sales tax will have a negative impact on tourism. However, he also mentioned a decision that was taken earlier by the government which requires hotels, among other establishments and activities, to submit 75 per cent of their revenues in hard currency. "This will definitely add to the burdens we have to put up with," he commented. A 25 per cent increase in the price of air tickets was received with shock by airline companies working in Egypt. Not only because 25 per cent is already an exaggerated rate, as many in the aviation industry believe, but also because the new rate was imposed only two months after an additional 15 per cent increase was made effective. "The two successive increases in taxes have created a state of uncertainty in the market. This is certainly a very unpleasant situation for us to face," commented a private airliner employee who wished to remain anonymous. Again, the increase was approved in 24 hours; no advance notification was given. "Supposedly the increase will become effective in July. This is hardly enough time for us to contain the situation because contracts have been signed and bookings have been made to next October and the rates cannot be changed until then," the anonymous employee explained. In the meantime, the government has also approved legislation to increase departure fees from LE5 to LE50, to be collected by airlines and added to ticket prices by October. The situation in the car industry is no better. Manufacturers believe that the car market will be the most seriously affected by the latest tax increases. "What we really fear is that if car prices increase any further, sales will most probably drop and this can have the most negative impact not only on the industry itself but also on related feed industries with investments estimated at LE2 billion," said Salah El-Hadari, head of the Vehicle Manufacturers Association (VMA) which is affiliated with the Federation of Egyptian Industries. El-Hadari noted that sales in 2003 were estimated at 52,000 vehicles, 32,500 of which were locally manufactured vehicles. "This is not a huge market, particularly if we know that local factories are working with only 30 per cent of their total capacity. Any further drop in sales will definitely destroy the industry," he commented. Market surveys show that vehicles less than 1000cc, which according to the latest legislation are tax exempt, constitute only two per cent of the total market while at least 86 per cent of locally manufactured vehicles fall within the 1000 to 1600cc range. The remaining vehicles are exports. El-Hadari explained that locally manufactured vehicles are already overburdened with sales taxes and custom fees on the imported intermediate materials. "It is amazing to know that 40 per cent of the total price of a locally manufactured less than 1600cc car is mainly taxes and custom fees," explained El- Hadari. In fact, exported cars face custom fees and sales taxes amounting to 70 per cent of the total price of cars in the 1000 to 1600cc range. Cars above that capacity are charged with a 135 per cent customs fee and a 45 per cent sales tax. "It is ridiculous to tax an already overtaxed product," he commented. According to the new legislation, public transport buses and minibuses will remain tax exempt so as not to touch a sensitive social nerve. However, pleas made by the VMA to study alternatives to taxation have been ignored. "It is absurd that the government turned down requests to increase the fees on export cigarette brands while more fees are being imposed on local products," commented El-Hadari.
