Value Added Tax (VAT) is the tax on the amount by which the value of an article/item has been increased at each stage of its production or distribution which means that taxes are applied to the difference between the seller-purchased price and the resale price. This is accomplished by taking full tax on all sales, but refunding the tax difference to the sellers.
It is a part from the consumption tax but unlike the sales applies to the sale of goods, less often to the sales of services. The tax is applied at the point of sale. Laws may allow sellers to itemize the tax separately from the price of the goods or services, or require it to be included in the price (tax-inclusive). The tax amount is usually calculated by applying apercentagerate to the taxable price of a sale. When a tax on goods or services is paid to a governing body directly by a consumer, it is usually called ause tax. Often laws provide for theexemptionof certain goods or services from sales and use tax.
The Egyptian law up till now did not issue any law organizing the value added tax, as in Egypt the sales tax is one that is applied as the taxes imposed on consumption.
The Sales Tax is stipulated in the Egyptian Law No. 11 for the year 1991 (the Sales Tax Law)
According to the Sales Tax Law, the tax is measured by 10%, imposed on the nationally manufactured products and the imported products, and shall not be imposed on the exported products as stipulated in the Executive Regulation of this law 'different categories for different products'.
The tax is imposed once the sale process or rendering a service is complete, and for the imported goods the tax is imposed upon discharging them from the customs, in other words, the tax is imposed when the ownership of the goods is transferred/the service is done.
The current situation regarding the VAT in Egypt
Since 2005 the Egyptian government has been postponing the promulgation of the value added tax law, out of hesitation associated with the reaction of Egyptian citizens. This law is recommended by the IMF in order to provide the funds needed to the Egyptian government.
The Egyptian Ministry of Finance has finalized the project of the value added tax law, but did not provide further information about the rates, concerned with this law; some opined that enterprises that are concerned will be with at least of EGP one million capital. And nothing has been mentioned regarding the small and medium enterprises. Moreover, it was speculated that enterprises for social purposes shall be exempted from this tax, and all other professions and services, including liberal professions. And the end user shall endure this tax, while the services owners shall pay their profit taxes after deducting the expenses.
Such a tax system has both positive and negative sides:
A) Positive effect of the VAT:
- Governments usually use VAT to increase its national income and compensate as much as possible the losses
- Increasing the circle of the taxpayers.
- Unifying the tax rate unlike the Sales tax which contains different rates for different categories.
- Controlling the informal projects through obligating the taxpayers to hold a copy from the certificate of incorporation during the transactions made with each other. Otherwise an extra tax shall be paid of 2%, which shall encourage the unregistered business owners to register their business in order to exclude the additional 2% tax.
- This law provides a 6 week period of reimbursing and guarantees a less period for the electronic period, unlike the sales tax law which provides 3 months period for reimbursing
- Guarantees deducting all the paid modifications on the production paid by the merchant" business owner" to the factories; any added value to the products.
B) The Negative effect of the VAT:
- An expected increase by at least 5% tax rate to most of commodities (depending on the VAT rate that shall be set by the law).
- A 10% increase to the taxes of commodities that are subject to a tax rate by 5% "Sales tax".
- A 15% tax rate to be applied over the non-agricultural raw materials, which was exempted from the Sales tax.
- 15% over the services in general as the new law imposes the VAT over most of the non-governmental services unlike the Sales Tax law which is limited to the Sales taxes on 17 services only.
At last it shall be mentioned that many entities are against the issuance of such a law like the Egyptian Association for building and construction, The Manufacturing Association, and the 6 of October City Investors Association. All with its own reasons, unlike the Governmental entities which supports the issuance of this law as it will benefit the State's treasury, but until the current moment this law is not issued and the Sales tax is the tax to be applied.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.