Ads will be subject to VAT (but not stamp tax), VAT drawback system for tourists could be expanded under sweeping changes proposed to Value-Added Tax Act
SMART POLICY- Most commercial advertising will be subject to value-added tax under sweeping amendments to the VAT Act that the Finance Ministry finalized yesterday and posted to its website (pdf). In a move sure to be welcomed by advertisers and media organizations alike, the amendments would (if passed) also lift the 20% stamp tax on advertisements. Direct advertising and merchandising were previously exempt from VAT and subject to stamp duties on the overall size per transaction.
Departing tourists would be able to claim VAT rebates on select items worth more than EGP 1.5k or more in a move that retailers should cheer; the executive regulations of the current act had previously outlined a system that would have allowed VAT drawbacks to start at an EGP 5k threshold.
Baked snacks, soap, and cleaning products would become subject to VAT, instead of a 5% “table” or “schedule” tax.
Businesses will need to file their VAT returns online every month. VAT currently needs to be remitted to the state’s coffers within 60 days of an invoice being issued, payment being received or a good / service being delivered, whichever is earlier.
The proposed changes would also afford special economic zones the same VAT treatment freezones receive. Businesses in special economic zones, including those in the Suez Canal Economic Zone (SCZone), would not be required to remit VAT for any goods or services they purchase or export. The move is part of a drive to give incentives to businesses that want to set up shop in SEZs, the ministry said in a statement. This comes a day after we reported that officials from the SCZone are working with the government to introduce incentives through separate legislative amendments to the law governing such dedicated zones.
Health Ministry allowed to exempt pharma components from VAT where it sees fit: The changes would also allow the health minister to issue decrees exempting raw materials used in the manufacturing of pharma products from VAT. This comes after a decree last July exempting 58 active ingredients and components used for medications. Pharma manufacturers are already granted VAT exemptions on active ingredients used in their products under the original 2016 legislation.
No VAT on blood collection, vaccines, contraceptives: Another change would exempt sellers of antibodies, vaccines, blood plasma and blood collection bags, and birth control devices and contraceptives from charging and remitting VAT in a change that has “covid-19” written all over it.
Other tweaks to VAT exemptions: Construction and maintenance works for places of worship, blended edible oils, and accessible vehicles would also be exempt from VAT. Those goods and services could still be subject to excise or “table” duties that can be either lower or higher than the VAT rate.
Other elements of the proposed changes:
- Paper makers would be exempt from VAT on their raw materials in a bid to boost the industry. We noted this earlier this year;
- Violators would incur higher fees and under more broadly stated circumstances;
- Water bills would no longer incur an extra charge from VAT levied on sewage treatment;
- International ferry operators would be exempt from VAT.
Where do we stand on the bill? The ministry published the proposals yesterday to invite public feedback. Once those wrap up, a bill should make its way to the House of Representatives for a discussion and vote. As was previously anticipated, the changes would leave the current 14% VAT rate unchanged.
Plan to widen the VAT tax base: Finance Minister Mohamed Maait told us in January that his ministry is aiming to increase the number of taxpayers to 550k from 70k through the proposed changes. This is planned to be done by “tighter” practices that will look to prevent businesses from understating the value of their transactions in VAT returns. Besides removing a ceiling on VAT law violation fees that would allow authorities to impose higher penalties, it’s still unclear how the draft changes are more stringent.
Bottom line: On first glance, this is a very smart, pro-business set of amendments.