Parliament last week approved a set of modifications to Income Tax Law 91/2005. The law sets rates and tax brackets for natural persons.
According to the Ministry of Finance, the aim of the modifications is to reduce the tax burdens on the lowest-income groups and redistribute them by creating a new segment for the highest-income earners.
The first bracket, on taxable earnings up to LE15,000, is exempt from taxes. The second bracket pays 2.5 per cent on earnings up to LE30,000, the following bracket 10 per cent for taxable income up to LE45,000, and the next 15 per cent on taxable income up to LE60,000.
The fifth bracket earning between LE60,000 and LE200,000 is taxed at 20 per cent. Those earning above LE200,000 pay 22.5 per cent. The modifications introduce a new tax bracket of 25 per cent for those earning above LE400,000.
According to a report by parliament’s Budget and Planning Committee on the bill submitted by the government, the law had been modified several times, most recently in 2017 when exemptions and tax brackets were modified. A tax-credit system was also established designed to support the lower-income classes and reduce their tax burden.
But the practical application of the tax-credit system had resulted in distortions of progressive tax rates, the report said. As a result, it was cancelled and tax brackets widened.
Income tax is imposed on wage-earners and the professional income of self-employed individuals such as doctors, lawyers, and accountants. The tax is also collected on revenues from commercial or industrial entities registered in their names and on revenues from real estate such as income from apartment rentals.
Individuals file a tax return listing income from one or more of these sources of income.
The current system should be beneficial to the lower-income brackets, but in fact it does not give them added benefits as they are likely to be already exempt from paying income tax, said former deputy minister of finance for tax policy Amr Al-Monayer.
He said the tax-credit system that was in place before the modifications of the law had ensured a form of progressive taxation because those with lower incomes had received greater reductions on their taxes than those with higher.
Under the tax-credit system, the lower brackets paid no more than 1.5 per cent of their taxable incomes, or LE100 at most. 15 million people had benefited from the system, he said, adding that it might have had some glitches, but it had worked for most. He pointed out that the International Monetary Fund (IMF) in December 2017 had praised the system, saying that the increase in tax credits was a good step towards a more progressive income tax.
The problem with the new modifications, according to Al-Monayer, was that they would cost the government some LE4 billion to cover exemptions that were not needed. “The lower-income brackets were already paying almost nothing,” he said.
As for the highest rate of 25 per cent on individuals, this was well-intentioned, Al-Monayer said, but international best practice shows that the income tax rate on individuals should not exceed the corporate tax rate as this leaves room for evasion. The corporate tax rate stands at 22.5 per cent in Egypt.
Moreover, the few thousand people that would be paying more on their incomes as a result of the higher bracket would not make up for the extra expenses the government would have to be bear because of exemptions, he noted.
Another tax expert who preferred to remain anonymous concurred. He said that individuals subject to the higher tax rate of 25 per cent could set up companies and be subject to the corporate tax rate to avoid the higher tax rate. He said that high personal income tax rates existed in countries including the US, but that these included all sources of income, including dividends.
He said that tax reforms should aim to broaden the tax base and reduce tax rates, pointing out that lower taxes are conducive to investment and spending. He said that in Egypt wage-earners were the main source of personal income taxes, but in December 2017 an IMF report had said that personal income tax “compliance is low due to a large informal economy and cash payments… [and] compliance on professional incomes is particularly low.”
According to data in the Ministry of Finance’s February monthly bulletin, 2019-20 taxes on employment income contributed around LE62 billion to tax revenues, while taxes on income from activities other than employment contributed around LE38 billion. Total tax revenues were estimated at LE857 billion.
*A version of this article appears in print in the 30 April, 2020 edition of Al-Ahram Weekly under headline: Taxed with good intentions