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VAT, depreciation of Egyptian pound could increase real estate prices by 15%-20% Real Estate Investment Division demands reducing VAT rate on construction contracts from 5% to just 4%
The parliament's General Committee is in the midst of an unresolved debate surrounding the potential approval or rejection of the value-added tax (VAT) law that was submitted by the government on Sunday. VAT has given rise to a heated debate between different sectors, but the debate between members of parliament has largely been concerned with the tax's rate than whether VAT is a yay or nay. On 24 August, the Planning and Budget Committee in parliament presented its reports to the General Committee, which in turn put up the proposal for discussion and voting. The General Committee is slotted to be the body that will decide on the tax's rate, after the Planning and Budget Committee left it to be determined by the General Committee, following a dispute between the Planning and Budget Committee and the Ministry of Finance over the VAT rate. The ministry is vying for a rate of 14%, while parliament is opting for the rate of 12%. VAT─also known as the goods and services tax─is a tax on consumer spending. VAT is a composite tax made up of the difference between the manufacturing cost and the selling price of domestic and imported goods. Applying VAT will subject all goods and services to sales tax, except those exempt from the law. Minister of Finance Amr El-Garhy said that the VAT will be applied at the beginning of October, after parliament approves the law. When the law is implemented, the government expects an increase in tax revenues by EGP 30bn in the current fiscal year. The VAT percentage applied to construction contracts is 5%. In this regard, real estate stakeholders opposed the law, alleging that it will affect the sector's growth and lead to an increase in prices for clients. The Real Estate Investment Division at the Federation of the Egyptian Chambers of Commerce (FEDCOC) demanded reducing the VAT rate on construction contracts from 5% to just 4%. The division demanded that the tax only be imposed on new contracts, and not retrospectively on old contracts. The division's CEO, Mamdouh Badr El-Din, said that VAT represents extra costs for businesses, which contributes to raising the cost of implementing projects, unit prices, and increasing prices on customers. Further, Madinet Nasr Housing and Development (MNHD) general manager Ahmed El-Hitamy said in a press statement that the new tax will not affect the real estate projects directly, but it will affect construction work, as well as the prices of construction materials. This is in addition to increasing global steel prices. El-Hitamy expects an increase in real estate prices over the next year by about 15% to 20%, due to the depreciation of the Egyptian pound, in addition to the application of the VAT.
Member of the Egyptian Businessmen's Association and Egyptian Federation for Construction and Building Contractors (EFCBC) Daker Abdellah said that the tax will add new burdens on operating companies in the real estate sector, on top of recent challenges the sector has faced in the past months. This will affect constructing companies on top of the increasing price of the US dollar against the Egyptian pound and its impact on the increase in prices of construction materials, such as steel, of which the price per tonne recently increased by up to 50%. Abdellah called for reconsidering the prescribed percentage of the VAT on construction contracts and reducing it in line with current market conditions to encourage investments, support companies, and reduce the challenges and financial burdens on these companies. Abdellah added that VAT will reduce the number of incoming investments as a result of its direct impact on the expected returns on investment. Therefore, the private sector might resort to reducing the size of its expenses as much as possible in an attempt to reduce the impact of the tax on profitability. Additionally, companies might also resort to laying off workers and cutting wages.
