VAT talk has been in the air since 1991, when Egypt signed an agreement with International Monetary Fund. Indeed, Egypt did take the first step and introduced a single rate Sales Tax. The government was planning to complete a full shift to VAT in the first 4 years. However, there was something that prevented Egypt from completing the shift: commodity prices, world economic crisis and internal Budget deficit growth.
The last 2 years have been especially hard for Egypt’s economy. After the last presidential and parliamentary elections in 2014, the Egyptian government has tried to stabilize the country’s economy. Multiple grants and loans were obtained from GCC countries that led to the growth of the government’s external debt. The new government also started a controversial “New Suez Canal” project, widening the canal to allow for high speed passage and an increased number of ships coming through which was completed through the sale of certificates to the Egyptian citizens with an estimated return rate of 12%. The Government projected a very high revenue increase from the use of the canal, but those projections after the official opening of the canal in 2016 are yet to come true.
The country’s difficult political situation in the past several years contributed to the fall in exports and an increase of imports.
One of the Egypt’s most important areas of the economy is tourism. However it suffered severe losses after a Russian plane crash over Egypt in 2015. All Russian and Great Britain airlines have canceled their flights to Egypt until Egyptian airport security significantly improves. This led to a 50% reduction in tourist visits in 2016 compared to the previous year. Some of the Egyptian resorts have been completely frozen.
In March the government once again announced the importance of further financial assistance from the World Bank, which could be dependent on the willingness of Egypt to transition into VAT.
In his address to parliament, Prime Minister Ismail Sherif warned that the country faced “difficult decisions” and “is still in a dangerous situation.” The inflation and the budget deficit are growing and the government is in real need of funds to replenish its resources.
In its 2016/2017 draft Budget, the government already accounts for the increased revenue from the implementation of VAT. The key benefits of the VAT that are stressed out by the government are:
- Ease of the budget deficit through increased revenue due to all goods and services being subject to tax, including electronic services
- Avoidance of the double taxation, due to the system of Input/Output VAT and a right to deduct VAT paid
- Streamlined tax system and reduced tax evasion
- Higher registration threshold – EGP 500,000
- Introduction of the Reverse charge mechanism
It all sounds great doesn’t it? So what is it that public is unhappy about? Egyptians biggest concern is the rate of VAT. The government approved a rate of 14%, which is a big raise compared to the present 10% Sales Tax. The Ministry of Finance issued a list of the 52 commodities that are going to be exempt under the new VAT regime. However, most of the essential goods are already exempt and the simple rate increase will still affect the public.
To address this and other issues that have been brought up as a concern by businesses and the public, the Parliament has created a committee to study the detailed sales tax data and compare it with the proposed VAT application. A meeting with largest businesses on the market such as, Pepsi, Toshiba and Etisalat might lead to edits in the law provisions related to the tourism sector and industries attractive for foreign investments.
The coming weeks will show if the disagreements and concerns can be addressed and if the Parliament will approve the implementation details of VAT in Egypt.