Economy in a week: VAT returns

This week, the government pursued the long awaited value added tax in replacement of sales tax, a move that is expected to raise tax revenues significantly. Meanwhile, the CBE decided to put the brakes on its main interest rates until inflation cools down. Finally, the new minimum wage has been clarified.

The Egyptian government is in the process of ratifying a bill to introduce value added tax (VAT) between 10-12 percent, to be imposed on all goods and services, with the exception of subsidized foods like oil and wheat.

Head of the Income Tax Authority Mamdouh Omar said at a conference last Sunday that the tax rate would be higher for goods such as cigarettes, alcohol and cars. The VAT would replace the current sales tax imposed on these goods.

VAT differs from sales tax, in that the latter is collected and remitted to the government only once at the point of purchase by the end consumer, whereas with VAT, collections and remittances occur each time a business purchases a product.

In this way, the total tax levied at each stage of a product’s life is a fraction of the value added by a business to its products, and so most of the tax collection is borne by businesses, rather than the state.

This would create a stronger incentive to collect the tax, as business should be able to recover the VAT that they buy in order to produce further goods and services.

However, VAT depends on a society’s capacity to apply it, as stated by Ashraf al-Arabi, former chairman of the Egyptian Tax Authority (and now Planning Minister) in a conference in 2012. Arabi said that VAT systems require merchants and factories to keep invoices and financial statements.

The current tax system makes it tempting to issue invoices of a lesser value in order to elude the sales tax payment or evade the tax all together, as the seller is not legally required to collect it, nor do they have any direct economic incentive to do so.

Egypt has discussed a VAT system many times since 2007, but it has never materialized.

Last August, Finance Minister Ahmed Galal confirmed the government’s commitment to introduce value added tax, in order to ensure a fairer distribution of tax and add the services sector to the tax base.

Talks of VAT peaked in 2012, when Egypt was looking to materialize structural reforms as part of securing financial assistance from the International Monetary Fund (IMF).

In November 2013, the State information Service issued a statement seeking help from the IMF, “in the application of the Value Added Tax (VAT), due to replace the incumbent sales tax.”

Generally, if sales tax is high, people start engaging in widespread tax evasion. Value added tax avoids the cascade effect of sales tax by taxing only the value added at each stage of production, and so, in theory, one can overcome tax evasion.

Tax revenues are expected  to jump to LE126 billion in 2013-2014 if the VAT is imposed, up from LE83 billion in 2012-2013.

CBE maintains interest after reducing three consecutive times

In its January meeting, the Monetary Policy Committee, headed by Sub-Governor of the Central Bank Rania al-Mashat, decided to maintain interest rates at their current levels.

The Bank has reduced the main interest rates — overnight deposit and lending rates, the CBE’s main operation interest, in addition to the discount rate — three times since last August by a total of 150 basis points. Although lowering interest rates can be a cause of inflation, the MPC at the time said that slow growth and low levels of investment would limits upside risks to price increases.

Lower interest rates, nonetheless, have the positive outcome of spurring investments and growth due to cheaper bank loans, as well as lowering government debt to local banks.

Egypt’s net domestic debt stood at LE1.5 trillion by the end of the 2013 financial year, with a total debt interest of LE146 million.

The statement read that, “Given the mixed balance of risks surrounding the inflation and the GDP outlooks at this juncture, MPC judges maintain that the current key CBE rates are appropriate.”

The overnight night deposit and lending rates currently stand at 8.25 percent and 9.25 percent respectively, while the CBE’s operation rate stands at 8.75 percent.

Minimum Wage Clarification

Regarding the ambiguity surrounding the minimum wage, state-run Al-Ahram newspaper released a report clarifying the details behind the increase, in addition to which sectors would be included in the minimum wage, and giving examples of salary breakdowns.

Over 4.9 million citizens stand to benefit from the increase in the minimum wage, including: 1.5 million teachers, 463 thousand members of the medical profession, one million temporary employment staff, and 2.3 million public sector employees, all in all costing the government nearly LE18 billion in annual salaries.

To outline the breakdown of the different salary schemes, the report gave an example of the sixth grade, which currently receives LE730, and would be increased to LE1,200. This increase of LE470 would be divided between a minimum wage increase of LE400 and a LE70 social insurance premium paid for by the government.

The original LE730 is further broken down into a LE194 basic salary, a LE428 variable salary and a LE109 social insurance premium.

Allowances, bonuses and any in-kind benefits received by workers would not be included in the calculation of the minimum wage, meaning the LE1,200 would be the lowest salary received.

World Bank: LE240 million dollars for small and micro enterprises

The World Bank has allocated US$240 million for small and micro enterprises, to reinforce their ability in locating continual financing. The Bank aims to offer technical assistance and help with the marketing capacities of its applicants.

The project, consisting of two stages, plans to offer credit and financing to micro enterprises through non-governmental banks and organizations in an initial stage, while during a second stage it would give credit facilities to small enterprises.

The loan aims to focus on women and young adults, allocating 25 percent and 30 percent of the loan respectively to these groups, while creating an estimated 111,000 jobs.

CBE sold US$1 billion worth of treasury bills and LE6.5 million t-bills

The Central Bank of Egypt sold treasury bills worth $1.07 billion with a one-year denomination. The auction, which took place last Sunday, received an average yield of 2.593 percent.

On Thursday, the CBE sold 182-day t-bills worth LE2.5 billion, with an average return of 10.625 percent, covered by bids of 2.85 times. 364-day t-bills worth LE4 billion were sold at an average rate of 10.808 percent and were covered 3.23 times. 

Sherif Zaazaa 

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