CAIRO: The rise in the sales tax on cement, iron and cigarettes will go into effect starting July 1, the finance minister told Al-Ahram state-run daily. Amendments to the sales tax, which will result in these increases, are meant to fund social welfare spending and infrastructure investment, according to the Economist Intelligence Unit report for June 2010. “The new budget…includes an increase in spending of LE 7.5 billion for healthcare, water treatment and infrastructure projects, which will be financed in part by tax increases on cement, iron, construction materials and tobacco,” said the EIU report. The report indicates that lower tax receipts in the current system are inflating the budget deficit. “An expansionary fiscal policy in the current fiscal year 2009/10, and lower tax receipts, will lead to a widening of the budget deficit to 8.7 percent of GDP, narrowing to 7.6 percent of GDP in 2010/11 as tax and other revenue grows,” the report adds. The increasing concern over tax revenues has led experts to discuss the sales tax and options for its reform, focusing on a possible shift to value-added taxes (VAT). Hassan Abdullah, of the sales tax authority, told Al-Ahram that he considers the recent amendments to the taxes on cement, iron and cigarettes as a kind of transition to the value-added tax as some of these businesses will be able to recover based on the value added in their products. Nevertheless, Abdullah, pointed out that the overall transition to a VAT is quite difficult in light of the global financial crisis. Recently there has been support from the tax administration in Egypt, accompanied by requests for reform from international economic institutions, to make the shift to VAT. According to Al-Ahram, Mamdouh Omar, head of research at the Egyptian Tax Authority, said that the VAT is the natural evolution of the sales tax. “Although there have been preparations made in past years anticipating this step, the global conditions and the financial crisis have delayed the move, which requires an active market and many developmental reforms,” he was quoted as saying. Last week in the monthly conference of the Society of Tax and Investment Experts, the move to value-added taxes was discussed. Ashraf Abdel Ghani, president of the society, said that value-added taxes have many advantages. He stressed the importance of discerning the limitations of a value-added tax by identifying the key areas where it differs from the current sales tax, particularly the scope of taxation. Abdel Ghani warned that a move to VAT will never be simple, as it will involve the introduction of many services that had never dealt with tax authorities. “There may be misunderstandings and discontent in the beginning; similar to what occurred with the application of the sales tax in the previous decade,” Abdel Ghani told Al Ahram. In a statement by Reham ElDesoki, senior economist at Beltone Financial, the justification for the transition is explained. “The main difference between the current sales tax and the value-added tax is that the method of calculation is more accurate in the latter, and more importantly and with regards to Egypt that the tax base will expand,” writes ElDesoki in the statement. “Currently goods and some services are included in the tax base of the sale tax. Under the new VAT system all goods and services, with specific exceptions, will be taxable,” she added. “While this will have an inflationary pressure when first implemented, it will serve to improve this specific tax's system as it will improve the administration while reducing the tax rate, eventually leading to an increase in revenues from VAT, as was the case when the income tax was amended,” the statement explained. Ministry of Finance expects significant revenues from the implementation of a fully fledged VAT system, equivalent to around 2 percent of GDP, which could help reduce the budget deficit. In an assessment of the transition, Beltone says, “We believe it's a positive development, and one of the important fiscal reforms which complements the package of fiscal reforms already implemented and will allow the government to reach its budget deficit target of 3.5 percent by fiscal year 2014/15.” The conversion from sales tax to VAT will occur sometime in early 2012, after the presidential elections are over, the statement concludes.
