The capital gains tax to be introduced to the Egyptian Stock Exchange may come as as a shock, due to its novelty in Egypt, but it will not have any immediate large scale positive or negative effect on the business sector, say analysts. However, it could pave the way for other tax legislation that could limit short term speculation in the bourse.

On Monday, the Egyptian government announced it had approved levying a 10 per cent capital gains tax on initial public offerings in the bourse. It did not specify a date for implementation, but said the law would be enacted by the president or by parliament once drafted.

Osama Mourad, chairperson and CEO of Arab Finance Brokerage Company, is very critical of the decision.

"The IPO market is already very weak. Over the past two years we did not see any major transactions," Mourad told Ahram Online.  "Now the government is just raising the cost for companies to go public and expand."

The Egyptian exchange has seen turbulent times since the popular uprising in early 2011 ousted former president Hosni Mubarak and his regime, with trading volumes and share prices hitting bottom. In 2012, the market started recovering, gaining some 50 per cent this year to date, but it hasn’t yet exceeded pre-uprising levels.

Shareholders of any given company who decide to sell part of their holdings in the stock market will see their profits reduced by the proposed tax.

Profits, however, are not the main reason why companies engage in IPOs. Being listed in the stock exchange makes it easy for companies to raise funds to expand and grow. From a macro point of view, IPOs are most beneficial activity in the stock exchange.

"For many companies, this 10 per cent tax will not stop them from going public, because they need it for expansion purposes," Hany Genena, chief economist at Pharos Holding explained. "Also, this 10 per cent is not that high a rate as IPOs usually see large profit margins for companies involved."

Egypt currently does not have any stock market taxation. In 2011, a 10 per cent dividend tax was suggested by the government, but it was quickly dismissed after facing severe opposition from the investment and business community.

"Stock exchange taxes exist in most countries in the world," says Amro Hassanein, professor of finance at the American University in Cairo. "And the country is short on resources, so this move is only natural," he added. 

Hassanein said that capital gains taxes are used in many countries to adjust the market by discouraging short term speculative trading and rewarding longer term investments.

The amount of revenues expected to be generated from the new tax is not much given its current structure. "Even before the revolution in 2011, Egypt was not very active in terms of IPOs," Mourad explains.

Nonetheless, Genena believes that in the big picture of the Egyptian economy this tax is positive.

"We have a serious situation in public finances, and we need to control the budget deficit," he said. "Companies would benefit from healthier stock valuations if the discount rate drops, and this will happen when state finances are under control and returns on treasury bills drop."

Moreover, many companies wait until the beginning of the financial year to start an IPO. "Maybe the government preparing itself to collect on any new deals at the start of 2013."

Another analyst, preferring to remain anonymous, linked the legislation to the case of Orascom Construction Industries (OCI), who was accused indirectly by President Morsi in his 6 October speech of having evaded taxes on its 8.8 billion Euros ($12.9 billion) sale of its cement unit to Lafarge SA in 2008.

The sale deal took place a few months after the cement company was listed in the exchange in September 2007. As a result, OCI did not pay taxes on the transaction, which took place inside the stock exchange and hence was tax exempt.

"The government might be enacting this law to be able to collect taxes from such huge deals in the future," the analyst told Ahram Online.