A better deal?

While traders fret over government plans to hold them liable to additional sales tax payments, critics maintain that consumers are the ones who will ultimately bear the brunt. Mona El-Fiqi and Sherine Nasr investigate
The new state budget for the fiscal year 2001/2002 heralded the news that the second and third stages of the sales tax are due for implementation in July, pending parliament's approval. In addition to a five per cent development fee to be levied on vehicle sales, the step is needed to cover a net deficit between government expenditure and resources assessed at LE20.7 billion, according to Minister of Finance Medhat Hassanein.
The second and third phases of the sales tax, stipulated in the General Sales Tax Law of 1991, applies the sales tax already levied on producers, importers and service providers to wholesale traders and retailers as well. The latter say the timing could not have been worse: at a time of recession, the last thing they needed was to bear additional costs.
However, Mahmoud Ali, head of the Sales Tax Authority (STA), maintains that the application of the last two sales tax stages will not represent a new tax burden on these distributors. The tax, he said, is an indirect one -- the trader collects it from consumers and gives it to the government.
Most traders say that the process of dealing with the Sales Tax Authority is enough to entail additional costs from them. Mounir Ragheb, chairman of the Wood Division at the Egyptian Federation of Chambers of Commerce (EFCC), said that 90 per cent of retailers and wholesalers do not possess efficient accounting systems. According to him, these businesses will have to hire the services of accountants to help them deal with sales tax officials, at a cost they will eventually end up adding to products' final prices.
Ragheb proposes that rather than have the tax levied on traders, a less complicated system would be to have producers and importers -- who have already been paying the tax since 1991 and are registered with the STA -- pay the amount to be derived from the two additional phases as well. The producer or importer would then retrieve his money by adding the value of the tax to the price of the commodity paid for by the trader.
Mustafa Zaki, chairman of the Importers Division at the EFCC, said the imposition of the two new phases is also likely to lead to the existence of different prices for the same product in the market. The reason, according to Zaki, is that the final stages of the tax will only be collected from 150,000 to 200,000 wholesalers and retailers registered with the EFCC. Traders whose total annual transactions are below LE150,000 will be exempted. "The price of the product at the retailer's who pays the sales tax might be higher than that set by the small trader who is not paying the sales tax," he said.
And, if the government decides to implement the second and third stages retroactively, Zaki warned, "traders will have to pay a lot of money at a time of market recession."
Some feel consumers will be hurt the most by the implementation of the tax's final phases. Hisham Hassabu, professor of accounting at Ain Shams University and a member of the Specialised National Councils, said traders and producers could make up for the tax by raising prices.
Experts also criticised the fact that the new stages of the tax are being implemented before carrying out badly needed reform in other aspects of the current tax system. According to Hassan Kamal, professor of taxation at Ain Shams University and deputy chairman of the Egyptian Society of Finance and Taxes, a more balanced approach by the government would have first reduced the income tax to avoid burdening taxpayers unjustifiably. The sales tax, along with the unified tax on income, constitute the main tax income for the state's coffers.
Kamal believes the imposition of the sales tax on traders will harm both small businesses and end users.
"Another negative impact is that tax collectors will be more encouraged to use unjust means to collect taxes, which will ruin an already shaken trust between taxpayers and tax collectors," he said.
However, EFCC Chairman Khaled Abu Ismail, who, along with the EFCC's board had met with the finance minister before the tax's final phase implementation announcement, said the step is actually necessary to fight tax evasion. "At every step of the chain, there will be a receipt for taxes collected -- as the product is being moved from the producer, to the wholesaler, to the retailer and, finally, to the consumer," he said. The result of this stringent system, Abu Ismail argued, is that tax revenue will increase by 20 per cent in the new budget.
In order to give traders a chance to adopt the accounting processes necessary for sales tax payment, the STA has accepted the EFCC's request to give retailers and wholesalers a one-year grace period to hand over their sales tax accounts.
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