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Value Added Tax



Value Added Tax

Value Added Tax, a barbed matter that has always been surrounded by fear of the poor and anger of the wealthy. A double-edged weapon that has proven to be an efficient way in increasing the government’s income, yet, always thought to be an extra burden on the Middle and Lower income tax payers. But what is Value Added Tax.

What is V.A.T.?

V.A.T. is a consumption tax based on any value added to a product.  For example, in the case of furniture production, V.A.T. is applied on the raw material such as wooden boards.  This V.A.T. value is added to the total value when a manufacturer purchases the wooden boards.  The manufacturer changes the wooden boards to a closet adding value to it, V.A.T. will be applied on this extra value added to the product and so on till the end user.

Origin of V.A.T.

Despite the fact that V.A.T.’s origin is not clearly known, yet it is agreed between all scholars that its concept has been introduced ages ago. While some said that V.A.T. came into force in 1973, introduced by Lord Barber, the chancellor under Sir Edward Heath of the UK, and started off as a simple 10 per cent tax on nearly all goods bought from a business.  Others stated that V.A.T. was originally a French idea, started in the 1950s.  The key factor of V.A.T.’s rise is several EEC’s directives requiring potential member states to apply a harmonized V.A.T. system to become a member in the EU.

Furthermore, the adoption of the V.A.T. in developing countries was emphasized by both the IMF and World Bank, who played key influences over countries to adopt V.A.T.

V.A.T. In Egypt

Differences between V.A.T. and General Sales Tax (G.S.T.) can be barely noticed except for one thing.  G.S.T. is only applied at the final stage of the product and consequently only burdened by the end user. While V.A.T. is applied at every stage of the product, consequently the tax amount, although increased, yet paid by every stage and split between several individuals and finally achieving social justice.

Before the adoption of the V.A.T., two scenarios were proposed; first, adopt V.A.T. and extend tax base to what is more than EGP 30 billion increasing the state revenue by almost 14%–and inflation is calculates/expected at rate of 2.6%.  Or, keep on the G.S.T. system while adopting firmer sanctions on tax evaders and no inflation is expected.

While the results of the first scenario seemed very tempting, Egypt decided to adopt V.A.T. system and puts the G.S.T. system into a deep sleep.

The application of the V.A.T. law was divided on two categories:

First category will be through imposing 13% on goods, anything that has physical existence, and services, anything that is not goods, during the 2016/2017 fiscal year and increase automatically to 14% by the beginning of 2017/2018. This 1% will be dedicated for the expenditure on the social justice programs, with no need for any further legislation.

Yet, it is essential to state that the V.A.T. law set an exception on the percentages above as the law implied that the percentage imposed on equipment and tools that are imported to be used in producing a product or performing services inside the Country is 5% (with the exception of buses and passenger cars which shall be subjected to the regular rate).

The second category will be through imposing 0% on any exported products and services produced or rendered by free zones according to the conditions and situations determined later by the executive regulations (article 3). The 0% will be imposed on the free zones projects that produce products or render services in order to be exported, also any imported raw products or services that are used in production process for exportation.

Furthermore, the V.A.T. law imposed an extra exceptional tax on certain mentioned products and services.  These products and/or services are put in a table called Schedule/table tax. The schedule tax has two implementations tables:

The first table stated a group of products like raw tobacco and gas.   The second table determined another group of services for example telecommunications services. Telecommunication services shall be subjected to an extra tax of 8%, the percentage may vary from one service to another, besides that of the V.A.T. For example, if a service costs EGP 100 then the applicable tax will be the extra 8% in addition to the regular 13% of the V.A.T.

Egypt is adopting V.A.T. law for several reasons:

  1. Simplify the legislation and facilitate the application of the law.
  2. Achieve tax justice without creating any implications on the basic needs.
  3. Consumers will pay more in return for luxury products and will pay less for essential goods and services or even no taxes in case of an exemption.

Dispute resolution system in the new V.A.T. Law

As for the dispute resolution methodology adopted by the V.A.T. Law, a dispute resolution committee shall be prepared and trained for resolving such disputes.  If this committee failed to reach an amicable settlement with the taxpayer, the latter enjoys the right to submit his claim before the State’s Council.

Finally, and to wrap things up, it is still unclear, even for Egyptian officials, how is V.A.T. will be implemented in Egypt and how is it going to be calculated.  These questions can only be answered when the executive regulations are issued. We aim on keeping a close eye to any further developments with the implementation of these new regulations and will make sure to update our readers promptly once more information is made available.