A source within the Ministry of Finance has said the draft law on value added tax (VAT) is still under discussion, and the date for its application has not yet been determined.
The law will be subject to community dialogue following the Eid Al-Fitr holiday, with it being unlikely to be applied directly after it.
The government seeks to pass a VAT law to overhaul the tax system and increase revenues from this source. This comes within the framework of the government’s plan to keep the budget deficit and public debt under control.
The source added: “To replace the sales tax with VAT is an irreversible decision, but we have yet to decide on when to apply VAT.”
The source said that VAT will not add to the price of cigarettes, a commodity which has a 50% tax on the final price of a pack, in addition to charges ranging from EGP 1.75 to EGP 2.75. The source noted the difficulty of adding an extra tax on cigarettes at this time.
However, economists say the VAT will cause inflation within the markets, especially affecting the price of cigarettes, telecommunications, and automotive products, as it will increase the cost of production.
In Presidential Decree No. 58, President Abdel Fattah Al-Sisi increased the tax by 50% on cigarettes, 200% on beer and 150% on other alcoholic beverages. This meant an increase of EGP 0.5 on each pack of local cigarettes, EGP 1 – EGP 1.5 on imported cigarettes, and EGP 200 – 400 per 100 litres of imported alcohol.
The source ruled out that VAT would add a burden on the tobacco industry, but added that the tax will be dealt with according to its efficiency. It will also be dealt with in the expectation that it will not increase the cost of tobacco production.
VAT is a consumption tax, in which the consumer is taxed on the goods and services that occur at every step of the production chain. Fakhry El-Fiky, former assistant executive director of the International Monetary Fund (IMF), is fearful the consumer will primarily pay the final cost of the tax by himself. “The government should first apply the real estate tax that has been stalled thus far, so as to increase resources, while also studying and seeking to reduce the expected inflationary impact of the VAT,” he said.
The government has stated that is seeking to apply this tax to distribute the tax burden to the largest base possible. Experts, however, contend the new tax will raise prices and increase burdens on Egyptians, who are still suffering from recent decisions to increase diesel, petrol, gas, electricity, and cigarette prices.
These experts believe that inflation will jump to 10.4% next month, given the three consecutive price increases on the above-mentioned commodities as well as the increase of consumption through Ramadan. Meanwhile, observers of the Egyptian economy expect inflation to rise to 14% with the introduction of the VAT.