Dialogue on the value-added tax (VAT) continued Tuesday during a press conference held by the Tax Authority, introducing new information regarding how the tax will be applied.
Despite the continuation of the dialogue, which has been taking place for several months, the Ministry of Finance has left many details regarding the tax obscure.
According to Minister of Finance Hany Kadry Dimian, the government is seeking to reduce the budget deficit, and the VAT is the way to do so.
Four main changes will be introduced to the general sales tax to convert it to the value added tax. Advisor to the Minister of Finance Mahmoud Ali said the ministry opted to amend the sales tax law instead of writing up a new law for VAT to avoid any price increases.
Those changes include the unification of the tax price, which remained unannounced, compared to the gradual sales tax that is currently applied.
The changes also include setting a general application tax and reduction on all products and services. The proposed VAT law also set a unified obligatory minimum volume of sales for the tax’s registration for any business, whether a manufacturer, merchant, or service provider, at EGP 500,000.
“The Tax would still allow businesses to voluntarily register for the tax,” Dimian said, noting that setting this limit excludes only 120,000 of the taxes filed. “Those 120,000 files contribute with only 3% to the total taxes collected.”
Ali said the cost of applying the VAT tax would be too high without the EGP 500,000 obligatory minimum sales set. The ministry is refusing to disclose the tax price and the exempted commodities to avoid any unnecessary fluctuations in the market. The fear of the application of the tax would result in an increase in the inflation rate is unnecessary.
“Inflation is estimated to increase by between 0.5% and 1.5%,” he said, noting that any price increase will be experienced only once and will not be gradual as time passes.
In September, Dimian said the predicted increase of product prices, except for food commodities, will range between 1.3% and 2.6%.
The minister highlighted that the increase will have an effect on the top 40% tier of earners among the population.
“The average spending of the top 10% tier 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,” Dimian said.
“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 in spending between the two will increase by an average of EGP 15 per month to EGP 48 per month,” he said.
The tax is already facing resistance from some sectors in the market, particularly the banking sector.
After the Egyptian Tax Authority (ETA) demanded that banks operating in the local market register under the VAT, the Federation of Egyptian Banks responded by sending a memorandum to the Central Bank of Egypt (CBE), voicing its rejection to the move.
This was followed CBE Governor Tarek Amer to inform the finance ministry of the banks’ stance. A high-level meeting was held last week between leaders of the CBE and the Ministry of Finance to discuss how to resolve the issue. The CBE is currently waiting for a response from the ministry.
The Ministry of Finance was criticised for an article in the law, which gives Dimian the authority to elongate the period for tax submissions if he sees fit.
Head of the ETA Abdel Moniem Mattar said harsh sanctions will be enforced. Dimian has previously stated that 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.
History of VAT
Dimian highlighted that tax has been partially applied since 1991 as the sales tax and that some changes are proposed to be introduced to the fully implement it.
The attempt to covert the sales tax to VAT was introduced in 2007, leading to the propositions of several laws that could regulate the tax. However, no notable progress was made to take an official step was towards that change.
The VAT law was almost introduced during fiscal year (FY) 2013/2014 but was not concluded due to the political turmoil in Egypt during that period with the ouster of former Islamist president Mohamed Morsi. It was in FY 2014/2015 that the dialogue for the tax finally started.
The fundamental details of VAT remain unannounced, despite previous statements made by the Minister of Finance in which he stated that full details on the VAT would be announced before the end of 2015, after the completion of the dialogue with civil society organisations.
The enforcement of the VAT will depend on whether or not it gets passed by the Egyptian parliament.
