The introduction of value added tax in all areas has the potential to increase trade movement in Egypt, according to Egypt’s Minister of Finance, Hany Kadry Dimian. In an exclusive interview with Daily News Egypt, Dimian talks about VAT, amongst other important topics currently affecting Egypt’s economy. He outlined the application of value added tax (VAT) in Egypt, as well as penalties for evading it, whilst also outlining the sanctions for tax evasion.
Can you tell us more about the VAT?
The value added tax (VAT) is already applied in Egypt, but only partially, and we want it to be a fully pledged VAT. This will be through the deduction of direct and indirect input and the expansion of the tax base. The tax burden on food commodities will remain the same, and the tax prices on vehicles will also remain unchanged. Taxes on exported products will remain zero.
A dialogue with the Federation of Egyptian Industries (FEI) and the Federation of Egyptian Chambers of Commerce and some business owners has been taking place. The dialogue is also taking place among the economic team at the cabinet. What is more important than applying the VAT is what it will achieve, as it will increase the trade movement in Egypt. It will also give the Egyptian producer the same treatment that is provided abroad. The tax revenue will be better connected to the economic activity as there will be some legislation that accompanies the VAT. Those legislations will ban selling products without invoices. This will help control the informal business sector.
When will the VAT be applied?
The target was the beginning of the fiscal year. During the upcoming two or three weeks the legislation will be uploaded onto the Ministry of Finance’s website. There will be incentives and repercussions for paying and evading the VAT.
What is the obligatory minimum volume of sales for the tax’s registration?
For industrial actives, it will rise from EGP 54,000 to EGP 500,000, while for commercial actives it will rise from EGP 150,000 to EGP 500,000. Those who would like to register will also have a choice to register if there volume of sales is less than the mentioned levels. We have around 40,000 files on traders who volunteer to register, because they seek the advantage of being registered.
What about the effect of the VAT on inflation?
The government expects the tax to increase the prices of products, except for food commodities, by 1.3% or 2.6%. The International Monetary Fund [IMF] was selected as an unbiased entity to measure the effect of inflation, and it found that it will result in a 1.3% price increase. We placed a more pessimistic scenario with different details than the expected 2.6% price increase. The government is also looking into social mechanisms to compensate the society but that is still under studies. The price increase will have an effect on the top 40% of income among the population. The average spending of the top 10% tranche of the population will increase from an average of EGP 3,400 per month to EGP 3,681 per month, with a 5.3% onetime surge. The spending of the lowest 10% will increase from an average of EGP 1,207 to EGP 1,213, with a 0.5% increase. The difference spending of the tranche between those two will increase by an average of EGP 15 per month, to EGP 48 per month.
What about the incentives and sanctions that will be applied to discourage tax evasion?
Sanctions will include a fine that will equate the values of the products that are being traded or transported without tax invoices. Meanwhile, incentives can include a partial repayment of the paid taxes, around 5% repayment in the case of products and 15% in the case of services. Monthly draws will also be held at the governorate level for around 1,000 citizens in each governorate for valuable prizes. An annual draw will also take place with a value of several million Egyptian pounds.
What is the government plan to finance long term projects? And will we see a new innovative method such as the one we saw for the Suez Canal?
Our priorities in financing projects is first for foreign direct investments, followed by the projects of Build-Own-Operate (BOO) investments, followed by projects of the Public-Private Partnership (PPP) investments. Investment in the nature of built-own-transfer (BOT) follows. There is also a parallel framework to finance projects using long term loans provided from regional and international banks such as the European Bank for Reconstruction and Development, International Bank for Reconstruction and Development, the African Development Bank and the Islamic Development Bank. In some projects, we rely on the direct government investment, and most likely these investment are stimulating for other investments such as roads and infrastructure. As for the Suez Canal method of finance, it was not just about finding a suitable financing method. There was a patriotic value to the project which has given it a very unique feature that is hard to be repeated for other projects.
There are some doubts about the economic returns of the Suez Canal project?
The economic returns have already begun, but it is too soon to reveal them. The return is not only financial, but also the types of services that the canal can offer. While the President was visiting Russia, we were informed by news agencies that the biggest oil company in the world is seeking to invest in services’ oriented projects in the canal project.
What are the incentives that will be provided to investors in Suez Canal and in similar areas?
These regions will be treated using the economic zones law, with all it offers of incentives. These regions will be self-administered while the government’s role will be to supervise.
How has the global economic decline affected the Egyptian economy?
It is too soon to measure the effect of the global decline. Even the IMF, when it prepared the World Economic Outlook report, excluded the global fluctuation, because it was too soon to prices its effect. The fluctuations are for Egypt’s enemies, but I say that while talking into consideration that risks still exist. For example, we still need to see whether the global fluctuations will have an influence on countries we export tourism to.
Why has the ministry not revised its mid-term expectations for the budget deficit?
We will revise the deficit, and I imagine it will happen during the first quarter of the next year. The IMF mission will be visiting Egypt soon and will conduct a mid-term review and maybe the hierarchy of the whole economy and not just the general budget. It might also be revised during the visit of the mission during the first quarter of first year.
For the fiscal year (FY) 2014/2015, indicators are very good. We are witnessing a decline in the gross domestic product (GDP) deficit by 0.7%, where GDP reached 11.5%. If the amount of grants provided to Egypt in fiscal year (FY) 2013/2014 were excluded, compared to FY 2014/2015, we will find that the total budget deficit has improved by 4%, which is an unprecedented success in the fiscal policy.
What was the effect of oil prices decline on the budget?
The petroleum subsidy bill decreased by EGP 40bn. It didn’t reflect on the deficit due to the financial situation of the Egyptian General Petroleum Corporation (EGPC) such as paying the foreign debt. This is in addition that the oil price is not the only factor such as currency exchange price.
What is the message you would like to send during the Euromoney conference?
We are determined to continue the economic reforms in Egypt especially in the health section and the money transactions sector. We believe in the economy’s ability to have a high placement among global economy through huge investments and improving the mechanism of economy. We are also well aware of internal and external challenges but we can overcome them.
Will the government present projects during the Euromoney conference? And what are the mechanisms to finance them?
The government plans to launch a large package of projects in different sectors during the Euromoney conference. The country will be depending on different financing mechanisms, whether as foreign direct investments (FDI), the Public Private Partnership (PPP), the Build-Own-Operate system (BOO), the Build-Own-Transfer system (BOT), or the ABC Plus Finance system.
There is another method of financing projects that depends on long-term aid provided by global economic development banks, including the International Bank for Reconstruction and Development (IBRD), the European Bank for Reconstruction and Development (EBRD), the Islamic Development Bank (ISDB), and the African Development Bank (AfDB). We have some general projects, for which we will resort to injecting direct government investments, especially as these projects are usually incentives for private investments, like infrastructure, roads, and energy grids
Will the government present projects during the Euromoney conference? And what are the mechanisms to finance them?
The government plans to launch a large package of projects in different sectors during the Euromoney conference. The country will be depending on different financing mechanisms, whether as foreign direct investments (FDI), the Public Private Partnership (PPP), the Build-Own-Operate system (BOO), the Build-Own-Transfer system (BOT), or the ABC Plus Finance system.
There is another method of financing projects that depends on long-term aid provided by global economic development banks, including the International Bank for Reconstruction and Development (IBRD), the European Bank for Reconstruction and Development (EBRD), the Islamic Development Bank (ISDB), and the African Development Bank (AfDB). We have some general projects, for which we will resort to injecting direct government investments, especially as these projects are usually incentives for private investments, like infrastructure, roads, and energy grids projects.
Indicators are very good. We are witnessing a decline in the gross domestic product (GDP) deficit by 0.7%, where GDP reached 11.5%. If the amount of grants provided to Egypt in fiscal year (FY) 2013/2014 were excluded, compared to FY 2014/2015, we will find that the total budget deficit has improved by 4%, which is an unprecedented success in the fiscal policy.
How do you view the effect of the new gas field’s discovery on Egypt’s economy?
The discovery of the giant gas field will serve development for the next generations, and will have a great financial impact, especially as natural gas has become unsupported in general. Selling this gas for domestic consumption will positively impact the state treasury.
