VAT no longer a salve for Egypt’s ailing economy

Last summer, Egypt’s long-planned expansion of its value-added tax seemed like a good idea.

The government needed revenue to plug a severe budget deficit, which in the year to end of June last year was running at 11.5 per cent of GDP, and it had been losing credibility for its reluctance to take measures to get its finances under control.

Egypt has pledged to implement the new tax in exchange for unlocking finance from the World Bank.

But in the past year the economy, especially the private sector, has not performed nearly as well as hoped, and now there is a danger that the VAT could do more damage than good.

The concept of a VAT has been floating around Egypt for years.

Unlike a sales tax, which only taxes the final transaction, a VAT extracts a share along every step of the production process. A factory, for example, can subtract the value of components it has had to buy to build its product, then pay the government only for the value it has added.

The government promised to implement a VAT under an IMF accord it signed in 1991, and indeed in that year it took the first step by introducing a simple sales tax. It promised to expand this into a fully fledged VAT within four years, but never quite got around to doing so.

It did, however, gradually convert the sales tax into something resembling a VAT in manufacturing, but not in services, where a simple 10 per cent sales tax borne by the end consumer is still in effect.

In 2008, the government tried twice to expand the VAT to services, but delayed it the first time because of a spike in international commodity prices, and the second time later in the year because of the global economic crisis.