Along with the summer heat, news of a controversial tax on capital gains hit Egyptian stocks last week, increasing shareholders' fears that their investments "were under attack" by the Government. Although Minister of Finance Samir Radwan dismissed impact on trading in stocks, as "only dividends will be taxed", the controversy among analysts and investors has not come to a halt. Egypt's benchmark index shed 228 points over three consecutive days after the announcement was made last week. Radwan, aware of the stock losses, has announced that "the Government mulls taxing dividends of corporations, joint-stock and limited-liability companies". But the heatwave, triggered by the Minister's announcement, may undermine a speedy Bourse recovery, analysts say. "The Government obviously needs funds to narrow the gap in the State budget. A tax on capital gains may reduce the deficit without adding any pressures on low-income brackets. But there should be better timing," said Hany Riyad, an analyst at Cairo-based Financial and Legal Consultants Centre. The proposed tax is levied on capital gains of individuals and corporations. By definition, capital gains are the proceeds of an investor when he or she sells an asset for a price higher than the purchase price. "The Government had to raise sales tax on tobacco products by 10 per cent and impose a progressive taxation scheme to pump more cash into the State's coffers. Who would complain about that? But when it comes to stocks, investors should worry," Riyad said. The Government aims to get around LE1.2 billion ($200 million) annually from the increase in sales tax on tobacco. Last week, the Government endorsed the biggest State budget in the country's history. It is forecast to total LE559 billion. Revenues are expected to reach LE350 billion and expenses estimated at LE514 billion, according to the Ministry of Finance. Tax revenues are expected to total LE232 billion in the fiscal year 2011/2012, according to the Ministry of Finance. The figure fails to meet the State's outlays, incurring a deficit estimated at 10.75 per cent of the gross domestic product. "In the future, when the political and economic circumstances improve, the Government may think of taxing capital gains, but not now," he said. "Emerging markets do not apply these kinds of taxes. At the moment they are not in Egypt's best interest," said Hussein Choukri, Chairman and Managing Director of HC Securities and Investment. Countries like Singapore, Turkey, Malaysia and the Netherlands do not have a capital gains tax. Brazil, Israel, Denmark and France tax capital gains at 15, 20, 28, and 32.3 per cent respectively, according to Tax Policy and the Economy by US economist James M. Poterba. "Such issues send shockwaves across the market. Investors get worried and the decline is inevitable. Before announcing anything about a possible tax, stock market experts should have been consulted to avoid harm," Choukri explained. Mohamed Maher, Vice Chairman of Prime Holding, said: "This is not the time to talk about a capital gains tax. They should put an end to announcements that might affect the market." He added that exempting capital gains from taxes in Egypt was advantageous, it "injected much foreign investments into the market and helped the pound to stabilise". "It's not the right time for such a move. Personally, I don't mind a 10 per cent tax, but the market is recovering. The situation hasn't stabilised yet," said Mohamed Assem, a 35-year-old investor. "I think that after the presidential elections the atmosphere will be much better. Only then should the Government consider a capital gains tax," Assem said. "I did not sell my stocks since I was sure that the Government would reconsider the matter," Assem added.
