On Monday, the House of Representatives passed the proposed value-added tax legislation. The only amendment to the draft legislation was proposed Sunday by the Finance Ministry, which was to reduce the rate to 13% in the first year of implementation, whereby the rate will increase to 14% from 2017. The parliament also increased penalties for tax evasion to help enforce the VAT's implementation. Fifty-six goods will be exempt from VAT. The implementation of the legislation was a condition to receive $12bn in financing agreed upon with the International Monetary Fund (IMF).
The VAT will replace the general sales tax in order to include previously excluded segments of the nation into the tax base, as well as simplifying the tax code. This is also expected to help target the informal sector, non-residents such as tourists, or rural areas in which tax compliance was less forthcoming. Implementation of a VAT is expected to help reduce the budget deficit by 1-3% and amount to 1% of gross domestic product in tax collection, equivalent to EGP 20bn in fiscal year 2016-2017. It is also expected to increase inflation by 1%.
Mission chief of the IMF for Egypt Chris Jarvis praised the government's decision to implement the VAT regime, stating that "the VAT is a modern and efficient tax. It will help increase government revenues, and reduce the budget deficit. It will also enable the government to collect more taxes from better off people and free up more resources for social spending for the poor and vulnerable groups."
Tax evasion penalties now could involve a three to five-year prison sentence and EGP 5,000-50,000 fine, or both. Tax evasion claims can only be filed at the request of the finance minister, while also giving the minister the authority to resolve disputes outside of court, if the due taxes are paid along with a penalty. Request by members of parliament to have tax evasion penalties set to a percentage of taxes owed were rejected by speaker Ali Abdul Aal, who stated that a percentage over nominal terms would be unconstitutional.
VAT was one of the required conditions of Egypt unlocking financing from foreign institutions, such as the IMF and World Bank. However, according to IMF research, there are significant weaknesses in VAT implementation in developing economies, such as a poor management system. It can also negatively affect exporters, which can lead to decreased trade volume due to delayed or incomplete refunds. Additionally, setting up the institutions to ensure a proper implementation of the VAT regime is an expensive process. VAT has also become infamous for being a regressive tax—an anti-poor policy. The poor and middle class consume a higher percentage of their income than the rich, who tend to have large savings and investments; thus, the working class will spend a larger percentage of their disposable income in VAT. Fifty-six goods and services will be exempt from the VAT, such as non-luxury, non-imported food, financial services, infrastructure and utilities, energy and minerals, healthcare, education, transportation, real estate, agriculture, publishing, and media.
Goods traded in free zones are exempt from VAT—good news for international exporters to Egypt, such as the United States and other countries who are seeking free trade zones in Egypt like Turkey and Russia. VAT is also exempt to the Armed Forces for anything purchased for the purpose of national defence.
