The value-added tax (VAT) is “credit positive” for Egypt, according to a report released by Moody’s on Monday. The investors service added that VAT is an integral part of the government’s economic reform programme.
The 13% VAT will take effect as of 1 October 2016, replacing the 10% goods and services tax.
The analysis reports that, on the one hand, it will help to increase the country’s currently low tax receipts and give Egypt the chance to receive funds from multilateral sources such as the World Bank and the African Development Bank.
On the other hand, with the increased number of exempted goods and services, the VAT “will result in a revenue shortfall of EGP 12bn, equalling one-third of the expected VAT revenue increase for fiscal year 2017”.
However, the minister of investment said earlier that the VAT will be increased to 14% by the next fiscal year, and Moody’s expects that “some of this shortfall” will be made up for through it.
On another note, the analysis reported that as a result the government will fall short of its targeted budget deficit—at 12% instead of 9.9%. This is due to the expected “slippages in revenue targets” and Moody’s expectation that the GDP will only grow by 3.5% instead of the government’s projection of 4%. Also, Moody’s expects that inflation will worsen after activating the VAT.
Regardless, the report added that the VAT is an important step to increase the tax revenues Egypt accumulates. Taking into account several countries with similar economies, exhibit 1 shows how low Egypt’s tax rates are compared to countries like Lebanon, Jordan, Ghana, Bosnia, and Tunisia.