Income tax enigma

Egypt's income tax law is once again under scrutiny and reconstruction. Sherine Nasr wonders if a new law will help untangle the nation's twisted tax system
It is rare that your average blue-collar workman stops to calculate how much tax money has been deducted from his monthly pay cheque. What matters most is the final figure -- the actual sum that ends up in his pocket.
It is an attitude typical of government employees -- the largest contingency of tax-payers in the country. For the rest of the tax- paying population -- those who comprise the industrialists and traders - the case is not quite the same. For them, taxes and bargaining go hand-in- hand. Once they submit their yearly tax report to the authorities, the negotiations with the Tax Authority (TA) begin.
"Taxes in Egypt have amounted to 40 per cent of the net profit of industrial and commercial activity," says former prime minister Abdel- Aziz Hegazi, who is now a professional accountant. "It has been reduced to 15 per cent in the majority of neighbouring countries, such as Lebanon and Jordan."
His point, in short, is that Egyptians have something to complain about: they are burdened with among the highest tax rates worldwide.
The country, too, should be complaining, Hegazi implies: high taxes have a severely negative impact on both local and foreign investments.
"Detrimental," Hegazi says of the impact.
The attempts to curb the tax problem have been numerous, but the results scarce. A new law on income tax prepared by the Ministry of Finance, however, is again raising pensive brows. Currently under review by the State Council, the draft law will soon be submitted to the People's Assembly for ratification.
The question, at present, is whether the proposed law on income tax is an entirely new one, or just a modified version of the present law -- Law No. 157 (first issued in 1981, and modified in 1993).
Given the number of modifications Hegazi says the new law introduces -- 20 at the least -- one would assume that the law is so-called brand new.
Talaat Hammam, head of the TA, insists that it is an entirely new law.
"The new law definitely has many advantages over the present one," Hammam said, explaining that its main advantage is a 30-40 per cent reduction on tax rates in various industrial and commercial activities. Subsequently, this raises the ceiling for family expenses and catalyses the shift to a unified tax system.
The new bill, however, has been the subject of a slew of criticism by tax experts, who seem disappointed at what it will actually offer.
"The new law was mainly proposed as a step towards moving on to a unified tax system," says Hassan Kamal, professor of taxes at Ein Shams University. "Yet officials at the tax authority seem to misinterpret this fact." Technically, a unified tax system means that tax-payers' various activities will be tallied to come up with a final, totalled, tax figure.
Kamal uses the anecdote of a government employee who happens to inherit a piece of land and a grocery store.
"According to a unified tax system," he says, "A tax-payer in this case will only pay one tax and cannot be subject to three different categories of income tax."
In reality, the case is not quite so under either the present or proposed law, which is expected to come into force by next year.
Thanks to the country's commonly-called "unfair" taxation system, the concept of a unified tax has been condensed to comprise the submission of one tax report per year, instead of different reports for the various activities a tax-payer may have.
"This is one flagrant example of taxation irregularities in Egypt," Kamal points out.
"If we take into consideration a number of other indirect taxes in addition to the sales tax, one has to admit that Egyptians are overburdened with taxes," Hegazi says.
One would hope that the hundred-odd modifications to the old law would mean a less gruelling tax system for the nation's 68 million population. A careful look at the ceiling of exemptions for family expense exemptions under the new law, however, reveals little appeal and much disappointment.
According to Law No. 157, those that fall under the categories of "single," "married," or "married with children"-- with an annual income of LE2,000, LE2,500 and LE3,000 respectively -- are tax-exempt. Under the new law, this ceiling has been raised to include the same categories with the increase in annual income ceilings of LE2,580, LE3,360 and LE4,200.
"This means that the ceiling of exemption has been raised by 29 to 40 per cent," said Mohamed Seif Amer, head of the Central Administration for Tax Inspection at the TA. He added that the proposed ceilings for tax exemption were based on a study of the various social classes, cost of living, and numerous economic and social changes that may affect the purchasing power of these tax- exempt classes.
While the researchers feel that the elevated figures are fair, many tax experts believe that the suggested ceilings for exemption are not quite adequate.
"It is really hard to set certain ceilings for exemptions to be valid for years to come despite the fact that many economic changes are taking place," said Karima Korayem, professor of Economics at Al- Azhar University. "And it is these tax-exempted classes that are the most vulnerable to these changes."
Korayem argues that the purchasing power of these classes should not be overlooked given that they constitute the bulk of consumers in the Egyptian market.
"To empower them is to revitalise the market," said Korayem, who believes that the relation between the stipulated exemptions and the economic status in a society should always remain dynamic.
Amer, however, argues that the State can no longer afford to offer further exemptions.
"The suggested exemptions in the new law will cost the coffer LE3.2 billion annually. Other scenarios will increase the sum to some LE5.7 billion, which is hard to afford," he said.
It is hoped that the shortage in the tax income resulting from these exemptions will be compensated by broadening the tax-payer society -- currently narrowed given the percentage of tax- evaders. The national ID number is believed to be one effective tool to identify those culprits.
While many tax experts call for lower taxes on some industrial and commercial activities as a direct incentive to the private sector, they argue that tax exemptions on these activities should still be subject to strict regulations.
"It is not right to say that export activities should enjoy a 10 per cent tax reduction," Korayem says. "Better is to define categories. An exporter should meet a certain category in order to enjoy the set exemption for that category."
The same idea applies to the 10-year tax exemption for projects in the newly- established industrial zones.
"This incentive has been misused by many businessmen who, before the 10 years come to an end, start a new activity in another area to enjoy another 10 years of tax exemption," Korayem says, emphasising that the new law should tackle these cases more carefully.
The talk is free-flowing, and the criticism and questioning abundant. The reality of the prospective law and its benefits is evidently not quite clear. Income tax Law No. 157 remains, as ever, an enigma.
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