EXCLUSIVE- SMEs could get a massive tax break if they join the formal economy: A Finance Ministry committee tasked with drafting a new SMEs Act has proposed that 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 and Tax Authority told Enterprise this week.

Small businesses earning anything below that amount will be divided into three tiers and charged a flat tax based on their top line, the sources confirm. We had reported last month that businesses with annual revenues of EGP 250k or less would face a fixed tax bill of EGP 2,000 per year under the proposal. Those with top lines between EGP 251-500k would pay EGP 5,000 a year, while enterprises making EGP 501k-1 mn would be taxed EGP 10,000. The brackets are designed to widen the tax base by giving incentives for small businesses to join the formal economy.

New definition of ‘small business’ under the proposed act? The committee is currently studying a new universal definition for SMEs, which will likely be based not only on revenues, but also the size of the company’s paid-in capital, the sources tell us. The maximum revenue threshold to qualify for the special 1% tax rate would be worked out as part of that process. The new definition of what constitutes an SME would have to be adopted by the Central Bank of Egypt, the Tax Authority and the Trade and Industry Ministry, all of whom are already working from a compromise definition agreed to last year.

Other incentives are still under study. The tax breaks aren’t the only incentives that could be on offer for small businesses that decide to go legit: The committee is reportedly considering offering perks including further tax exemptions for a period of time, lower prices for power consumption, covering social insurance costs, and issuing expedited temporary permits for the installation of utilities and infrastructure, among others. Sources had previously told us that access to water and electricity would be conditional on a business registering with the Tax Authority.

The act would also impose penalties and sanctions for violations, according to our sources. These may include provisions that give the Finance Minister greater power to crackdown on fraud and attempts to manipulate or trick the system to gain access to benefits granted to SMEs under the law.