One month after its application, the business community and the government are locked in a dispute over the workings of the sales tax, Sherine Nasr writes Click to view caption The Sales Tax Authority's (STA) ongoing negotiations with traders over the application of the sales tax in its final form have yet to produce some concrete results. After a year of quarrels, controversy reached its peak on 1 October, the due date for the full application of the second and third stages of the sales tax. The first stage was launched in August 2001. As of the due date, the temporary bilateral agreements signed between the STA and businesses were set to be cancelled and a 10 per cent sales tax was due on all commercial and industrial activities whose profit margin exceeds LE150,000 annually. A one-year grace period had been given to businessmen to register their names, type and volume of activity at the STA and to start issuing "sales tax bills", which are documents showing sales transactions. "The whole idea of the grace period was to give businessmen the opportunity to register voluntarily at the authority," said Mahmoud Mohamed Ali, head of the STA. "That is why we refrained from holding unregistered traders legally accountable during the past year. Now, unregistered traders will be subject to punishment." Ali told Al-Ahram Weekly that he has a list of the names of tax evaders, many of whom are well-known members of the Federation of the Egyptian Chambers of Commerce (FECC). Businessmen, however, have their own point of view. "There can be no worse time to apply the final stage of the tax than now, while the market is suffering from a persistent slowdown," said Khaled Abu Ismail, chairman of the FECC. Businessmen also are confused about how the tax will be calculated for the different sectors. Although in theory there is one law governing the sales tax in all sectors, in practice, each sector has its own special nature. For example, textile industry entrepreneurs came to an agreement with the STA to pay an 18 per cent sales tax on the price of spinning material when the tax was first applied in 1991. "That was a good agreement because the STA could collect the taxes more efficiently at the source," said Alaa Arafa, owner of a textile company. However, with the application of the final two stages, a 10 per cent sales tax is now due on all the stages of production. "If the STA applied this system, tax revenues will certainly drop because the authority is incapable of controlling each and every activity in the textile industry and this will give way to more incidents of tax evasion," Arafa said. In some cases, the application of the tax would seem ridiculous. The gold market is a case in point. Since 1991, a one per cent tax, amounting to an average of LE500, was imposed on every kilogramme of manufactured gold. "If the 10 per cent sales tax is now applied, the tax would jump to LE5,000 per kilo, which is impossible," said Maher Shafiq, a gold manufacturer. Meanwhile, many of the technical problems related to the sales tax have not yet been settled. For example, businessmen who have tax files complain that the fact that only businesses whose profit margin exceeds LE150,000 are liable to the tax has created an atmosphere of unequal competition between traders. "It is the few big companies with organised accounting records that pay the taxes, while small ones, which constitute the bulk, do not," said Arafa, adding that almost 60 per cent of the ready-made garment workshops operate illegally and do not have tax records. Arafa said many small businesses forge bills to escape the tax. "The STA lacks the system with which it can track down those evaders," he said. Since these businesses are not paying the tax, they can afford to sell their goods at lower prices, which makes tax-paying entrepreneurs feel they are being punished for complying with the law. "This is an extremely bad sign in a society that is trying hard to encourage businessmen to respect the tax system," Abu Ismail said. Redallah Helmi, head of Al-Sharqiya Chamber of Commerce and the Chamber of Wood Industry, believes that the only way to accurately count the number of taxpayers in Egypt is to register all traders, regardless of the volume of their activities. This suggestion, however, was overruled by the STA chairman, who claims that this would weaken the authority's ability to reach for the targeted categories of taxpayers. "The cost involved in tracking down all traders around the country would probably exceed the total value of the tax itself," Ali said. In the meantime, there is a major hurdle on the way to full implementation of the sales tax. The tax calculation process is based on proper documentation and the use of sales bills that include the name of the product, the quantity sold, the price and the category of sales tax imposed on the sold item. Unfortunately, almost all sales transactions are carried out without sales bills. "The tradition simply does not exist. It takes a lot of time to create a new concept in the market," Helmi said. Tradition is hardly the only thing standing in the way. Since sales bills are the documents used by the income tax department to determine a trader's volume of activities, it is the last thing he would want to disclose. At present, representatives of various businesses are consulting with officials at the STA to come up with an effective way to apply the tax. Many are worried about the inventory for which the tax has already been paid. "We have been given a three-month grace period to sell the commodities in our stores. Starting 2003, a 10 per cent sales tax is due on each item we sell, including items in storage," Helmi said. However, most traders believe they are being given insufficient time to deal with the inventory, especially in a time of recession. "The officials at the STA remain elusive about this issue and we have no idea how this matter will be resolved," Arafa said.
