On the new income tax amendment package: A step forward that does not address the distortions of the tax structure that favours the wealthy
On May 29, the House of Representatives finally approved a package of new tax legislation that includes increasing the tax exemption limit on individual incomes, and imposing a new higher tax bracket of 27.5% on incomes that exceed EGP 1.2 million annually. In addition to imposing taxes ranging from 5-20% on recreational activities, and on goods purchased from duty-free shops, along with applying 10% fees on some luxury goods.
Some of these amendments move in a positive direction from the point of view of tax justice and social justice. ٌٌThe new increase in the exemption limit for employees’ income constitute a positive step because it raises the exemption limit for low income earners, and it demonstrates accurate targeting of wage earners who have fallen below the poverty line due to successive inflationary shocks. Inversely, these low income earners typically bear large tax burdens, as the share of taxes on income from employment in the budget of the new fiscal year is 8.8% of the expected tax revenue, compared to 9.5% of the expected total taxes in the current fiscal year. According to the latest income and expenditure statistics, an important segment of the poor in Egypt are wageworkers. In addition to financing this difference by imposing a new upward bracket on upper incomes, the amendments acquire special significance in terms of rebalancing the budget burdens and in confronting inequality.
However, these measures, although they are in the right direction, are still much less than what is needed, and from the realistic margin in which there is actual room for more manoeuvre. As the numbers indicate possible and logical areas for taxes of various types that expand the base of taxpayers from large income earners and companies, especially since it does not affect the structural distortions that favour the owners of wealth and large income earners at the expense of consumers and those with lower wages.
Taxes on goods and services still account for the lion's share of the tax revenues in the new budget. It amounted to 665 billion pounds, which equals 43.5% of the total taxes. It is true that it decreased from the expected 46.2% in the current fiscal year, but its percentage is very large and indicates that consumers will continue to bear the bulk of the tax burden.
For example, the total expected taxes in the new budget on the profits of companies (excluding the Suez Canal and the Egyptian General Petroleum Corporation, which are government-owned agencies) amounted to only about EGP 202 billion, which represents a downward trend compared to the current and previous fiscal year, at a rate of 13.2% of the total proceeds, compared to 16.5%. % in 21/22 and 14.2% in 22/23, which means an alleviation of the tax burden for the private sector and public business sector companies, despite the achieved real economic growth, which is expected at 4% of the GDP, and that is mainly generated by the private sector.
The percentage of what these companies pay decreased from 2.1% of the GDP to only 1.7% in the new budget. This indicates a continued imbalance in the tax structure, with the poorest groups bearing the greatest burden.
The same applies to taxes imposed on treasury bills and bonds. Despite the increase in the share of Egyptian and foreign financial institutions and even the family sector in profits generated from interest in light of the increasing inflation of public debt and the rise in interest rates; the expected tax revenue on them will not exceed 1.3% of GDP. It is an increase of 0.3% from the current year’s forecast, which declined by 0.1% from the 21/22 fiscal year, when it reached 1%, then fell to 0.9%, despite all the increases in debt and interest during the current fiscal year.
The amendments also approved the application of a Capital Gains Tax, which has been approved for several years now but without implementation, at a rate of 10% on only 50% of the gains realized from the sale of shares in newly listed companies. This percentage drops to 25% two years after the amendments are approved.
The Capital Gains Tax may enter into force after the various delays as a result of the pressures of influence groups in the Egyptian Exchange and financial pressure groups. These delays met with objections from the International Monetary Fund, but the exclusion of foreigners from the application and its other large limitations appear in the proceeds that do not exceed 159 million pounds in the new budget with an expected increase of 38% over the current fiscal year, but it still constitutes only 1% of the total tax revenue.
Continued reliance on the value-added tax threatens social justice, as the majority of those who pay it are ordinary consumers, especially those with low incomes, many of whom fall below the poverty line or close to it against the backdrop of increasing inflation and poverty rates. Added to this is the threat that this tax poses to the middle class, which is slated to fall into poverty, in a manner that is proportional to how much purchasing power it loses to this tax.
And based on the fact that the tax system is one of the basic elements of society as classified in Article 38 of the Egyptian constitution, and aims to develop state resources and achieve social justice and economic development; we believe that finally approving the capital gains tax is a good step forward, and one that EIPR has long called for. It is worth noting that Article 38 of the Egyptian Constitution also stipulates that a multiplicity of sources should be considered when imposing taxes, and that taxes be progressive in relation to the capabilities of the different segments of society. The same article also stipulates that the tax system guarantees the encouragement of labour-intensive economic activities, and bolsters their role in economic and social development. This in turn should achieve the constitution’s intentions as elaboratred in the objectives of the economic system in Article 27 of achieving social justice, sustainable development, creating job opportunities, and adopting a fair tax system that fosters the economy through the fair distribution of resources and reducing income discrepancy.
The total taxes expected to be collected by the Egyptian state in relation to the GDP is 12.9% in the new budget, up from only 11.9% in the current year, which are rates that are significantly lower than tax rates in economies of similar size to the Egyptian economy and compared to developed countries and the United States. This means that there is a great scope for change to expand tax revenues and broaden its payer base to include the rich, specifically those engaged in tax evasion and tax avoidance, as well as self-employed businesses, an expansion that could contribute to reducing social inequality in Egypt.