If you have been closely following the news recently, you probably have heard about the “new” Value Added Tax (VAT) that is currently being reviewed for approval by the parliament, expected to increase the tax revenues by almost EGP 30 Billion in the first fiscal year. Many people misconceive the adoption of VAT as a new tax to be levied on consumption, yet, it is merely a natural upgrade to the currently implemented General Sales Tax (GST).
So why the move to a new sales tax system?
It’s simple. The current GST had been amended several times to adopt a number of elements from the VAT system in attempt to maximize the sales tax revenues – yet had failed to provide the full tax ecosystem that is required for the successful implementation of such control measures. The newly proposed VAT law comes with a number of structural and legislative reforms that would create the right “ecosystem”.
The main purpose of shifting to a VAT system is to eliminate legislative distortions in the GST Law, widen the taxpayers base and protect the customers’ rights to receive proper invoices with all transactions. How does the VAT differ from the GST?
In very simple words, the VAT holds all sellers across the value chain liable to collect the sales tax at every stage of the supply chain, while under the GST system, only the retailer is liable to collect the sales tax directly from the end consumer. In other words, under the VAT, suppliers, manufacturers, distributors, retailers and end consumers all pay taxes on their purchases, which are then credited to each taxpayer with the exception of the consumer, who is liable for the payment of the consumption tax at the end.
Using this system allows the tax authority to have proper visibility on all transactions since resellers pay tax to the vendor and reclaim the VAT for the tax amount paid on business inputs, and therefore everyone along the value chain must report the transaction in order to receive their tax credits; Consider that all sellers are now working for the tax authority (TA) to report and collect sales tax revenues.
Yet, in order to be able to successfully implement the aforementioned system, structural and operational reform is required within the tax authority and to the tax ecosystem as a whole. Among many proposed reform initiatives, one required operational reform would be the upgrade of the Information Management capabilities. With a large inflow of transaction data, the successful and proper implementation of the VAT system lies heavily on the automation of the VAT reporting and collection to ensure that the TA can process, monitor and audit this vast amount of information that will be reported on a monthly basis. By having an automated system, the TA will also be able to identify missing transactions along the value chain, and thus will be able to identify purchasers and sellers who did not report their transactions.
A second reform that will be required from the Tax Authority is to upscale the capacity of the Tax Inspectors in order to be able to utilize the new IT system as a solid enabler for increased tax revenues.
A third and very important reform that is required to the tax ecosystem as a whole is the incentivizing of the use of invoices by the sellers and for the consumers; if invoices aren’t issued, there’s very little chance of tracking the transaction. One interesting proposition is to have a nation-wide lottery campaign on all invoices that will be issued after the implementation of the VAT (ongoing or for a set amount of time) to encourage customers to request their invoice from any retailer, with the prize amount to be deducted as a percentage from the tax revenues.
With an expected increase of more than EGP 30 Billion in tax revenues, there’s a lot of pressure on the Ministry of Finance and the Tax Authority teams to deliver a successful migration to a more sophisticated and efficient sales tax system, nevertheless, if the required reform is not implemented properly and in due time (prior to the implementation), it is quite possible that the VAT would have a negative (even if temporary) affect on the tax revenues.