EXCLUSIVE- FinMin backtracks on massive tax breaks to SMEs for joining the formal economy: The Finance Ministry has formed a committee to revisit the draft SMEs Act, which lays out incentives for small businesses to join the formal economy, a government source told us this week. The committee wants to do away with the tax breaks and exemptions offered to SMEs in the current form of the draft law, the source said. “After further studying, international case studies have shown that offering tax breaks to those who don’t already pay taxes does not incentivize them to begin filing tax returns,” the source added.

Instead, the ministry will be guaranteeing a host of other non-tax incentives, the source added. This would include improving the business’ access to utilities, to end clampdowns by the authorities on unlicensed businesses, and facilitate funding for them through the central bank’s SME initiative.

There will be penalties for those that do not register with the tax authorities after the law has passed, the source warned. He did not name what these penalties could entail.

As for how the law would define SMEs, the source noted that the law will use the CBE’s definition, but will contain provisions that will allow the Finance Minister to amend it when need be. The CBE defines “micro enterprises” and businesses whose top line is less than EGP 1 mn. “Very small” businesses are classified as those making EGP 1-10 mn, while “small” businesses are defined as having a top line of EGP 10-20 mn. Medium enterprises are defined as those making annual revenues of EGP 20-100 mn.

Background: Tax exemptions had been at the root of the law back when it was drafted under former Finance Minister Amr El Garhy. Small businesses earning more than EGP 1 mn a year (and less than a ceiling that has yet to be determined) pay a nominal 1% tax on their revenues under new legislation now in the drafting stage, sources from the ministry told Enterprise. Small businesses earning anything below that amount will be divided into three tiers and charged a flat tax based on their top line.