Taxing pains

While Egyptians are preoccupied with frequent power cuts, biting fuel shortages and a boiling political climate amid stifling heat waves, a new fiscal year has crept in just as protests by both opponents and supporters of the president are gearing up for mass demonstrations on June 30.

Outside of the political whirlwind lies an ailing economy with a new budget that will be implemented come July 1: The plan, which citizens may be little aware of, entails more taxes on incomes, properties and consumption.

The recently approved bundle of taxes was included in the state budget for fiscal year 2013/2014, with the main goal being to tighten a gaping budget deficit that has been steadily widening as economic conditions deteriorate.

A deficit of at least 10.8 percent of GDP this fiscal year is expected to rise to 11.6 percent in the next as the government implements subsidy cuts, according to the International Monetary Fund’s Regional Economic Outlook Update for the Middle East and Central Asia.

“Inflation is expected to rise in Egypt, Jordan, Morocco, and Tunisia, reflecting recent and planned subsidy cuts,” states the report.

Earlier this month, Investment Minister Yehia Hamed forecast that the deficit for the current fiscal year would reach 11.5 percent of GDP, exceeding previous projections.

To feed the growing deficit in state resources, the government resorted to amending the tax laws initially issued on December 6 2012. These tax measures were swiftly suspended at the time, and the reasons for doing so remain unchanged: Egyptians are unable to absorb the impending price increases and added burden of greater levies.

From the government’s standpoint, the newly approved tax laws are part of wider reforms aimed at protecting foreign investment, nurturing economic equality and boosting revenues all while helping reduce the deficit.

Targeted tax proceeds in fiscal year 2013/2014 are LE356.9 billion, nearly three-quarters of total revenues estimated at LE497 billion. This compares to LE266.9 billion in the previous year, which accounted for nearly half of revenue.

“If we need to develop a new tax policy or employ tax reforms, we have to put clear goals for imposing new taxes, but the recent issuing of new tax laws or the amendment of existing tax laws demonstrates the absence of any such vision, especially what happened with imposing tax on bank provisions and then canceling it later,” according to Ashraf al-Araby, former head of the Egyptian Tax Authority.

The Shura Council had approved a tax on bank provisions until banks vehemently opposed imposing taxes on money set aside for bad loans and losses. The Finance Ministry reached an agreement with the Central Bank of Egypt that this tax would not be collected without its authorization, in effect canceling the levy.

While taxation is one tool to manage the economy, these critical questions first need to be answered: In light of the sluggish state of the economy, will new taxes help attract foreign direct investment? Broaden the taxpayer base? Create new jobs and revive the economy as a whole?

“I have my doubts that any of this will happen,” Araby says.

He explains that the budget deficit is not absolute; it is related to GDP. If the deficit is 11 percent of GDP, it is better to decrease the deficit by increasing gross domestic product, which is done by growing economic activity by creating new jobs, boosting exports and tourism.

The point he makes is simple: There is always a way out of the deficit dilemma other than tax levies.

But at the same time, Egypt continues to be — as it has been over the past two years — in talks with the IMF over a $4.8 billion loan expected to restore confidence in the economy and put a stamp of approval on investing in Egypt, thereby unlocking billions of dollars in other funds. And the IMF has repeatedly advised Egypt to curb subsidies and shake up its tax system.

If the measures aren’t implemented, the deficit could reach LE312 billion, or 15.2 percent of GDP, officials have said.

“We won’t be able to cut the deficit as required if the laws regarding the procedures planned in the budget aren’t adopted,” former Finance Minister Mohamed al-Morsi Hegazi warned when the budget was first introduced to the Shura Council, pointing to tax law amendments and subsidy cuts as well as a partial restructuring of public sector wages.

But the heavy burden of price increases and subsidy cuts will not fall on the well-to-do alone. In fact, many have repeatedly argued that it is set to hit the poorest the hardest.

While many of these taxes will be paid by the wealthy, the major source of income will be a regressive sales tax, explains Araby. The result of a regressive tax is that the lower-income taxpayer pays a larger percentage of their income in taxes than the higher-income taxpayer.

The law exempts those who earn LE5,000 or less a year from paying income taxes, similar to the policy under ousted President Hosni Mubarak. The new law also considers everyday expenses, allowing up to LE7,000 in tax deductions. This expands the bracket of those exempt from paying income taxes to include those who earn salaries of up to LE12,000 a year.

The second, third and fourth layers of tax categories have also been expanded, lowering taxes by around 5 percent on a range of annual incomes up to LE250,000. Such details may be used to help improve the popularity of Islamist parties in the upcoming parliamentary elections expected to take place sometime later this year.

Yet among the changes approved are taxing small- and medium-sized businesses at the same rate as multi-million dollar businesses.

The law raises taxes by 5 percent on companies earning US$1.4 million or less a year. They previously paid 20 percent in taxes. The unified 25 percent tax comes at a time when smaller companies are already suffering the impact of a dismal economy, inflation, a dollar crunch and a depreciating Egyptian pound.

Reham Hamza, senior financial analyst at Okaz Stock Brokers, says that most of the major companies with profits exceeding LE10 million or even LE5 million will not be affected by either the unified corporate tax or the sales tax. “The 5 percent increase in corporate taxes is nothing to huge industries, such as cement or building materials for example. It is the small and medium businesses that will be harshly affected,” she says.

While the new income tax and corporate laws are set to be implemented starting next month, a less popular increase in the sales tax has been postponed to the third quarter of the fiscal year.

Although arguably necessary to cut the deficit, especially that the goods to be taxed are not essential commodities, the increase in the sales tax from 10 percent to 12.5 percent on selected items was postponed for political reasons. The government plans to first increase the sales tax on cement, iron, cigarettes, alcoholic drinks, soft drinks, mineral water and telecoms.

A sales tax will be passed on to consumers, with companies collecting it on the bill to be paid later to the tax authority, Hamza explains.

Increases on certain goods await a radical change in the laws governing sales taxes, which will be transformed into a value-added tax (VAT) extended to virtually all products — with a few exceptions — by November 2013.

Araby confirms that proceeds from VAT will not be as substantial as expected, unless it is increased from 10 percent to 14-15 percent.

He adds that in a strong economy, if the government imposes taxes, manufacturers may absorb some of the added expense while passing on a fraction to consumers. But in an economy such as Egypt’s, the whole of the increase is typically passed on to consumers. Many industries may try to cut costs by laying off workers and halting any expansions plans.

As for the property tax law, which has been in the works since 2008, it should come into effect in July, to be paid by high-income taxpayers.

The Shura Council approved amendments exempting single-home owners from the tax and raised the category for taxable properties from LE500,000 to LE2 million.

While the government expects to collect around LE2.7 billion in revenues from this tax, the operational costs of the Property Tax Authority in the new budget is about LE2 billion.

“It sounds like a joke to be collecting a total amount of about the expected annual operating cost of the authority,” Araby scoffs, seeing it as further evidence of general confusion and the absence of viable policymaking.

Noha Moustafa 

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