Cairo is planning to introduce legislation to reduce tax avoidance and will raise taxes on tobacco products and construction materials in the 2010-11 budget in an effort to reduce the budget deficit, according to a senior government official.

The cement excise has only been bringing in EP12-15m a year … the new tax will bring in EP1bn

Hany Dimian, minister

The draft budget, which is currently being debated in the National Assembly, features a substantial rise in taxes on cement and steel and proposes increased tax rates on cigarettes.

“The tax on steel will be increased from 5 per cent to 8 per cent,” says Hany Dimian, the deputy finance minister. “We will also replace the excise on cement with a 5 per cent sales tax.” The cement excise is currently £E1.40 ($0.25) a tonne.

The increased tax burden on a sector that is growing rapidly and is underpinned by strong domestic demand will substantially increase government revenues. “The cement excise has only been bringing in £E12-15m a year,” says Dimian. “We expect the new tax to bring in E£1bn.”

The draft budget also includes tax increases of 40 per cent on cigarettes and 100 per cent on molasses, the tobacco product used in water pipes.

Amendments to the income tax law have also been proposed by parliament’s Committee of Planning and Budget in order to boost tax collection rates, says Dimian.

The new legislation will criminalise service providers who do not provide receipts to customers. “Service providers have to be registered, and if they don’t issue receipts it will be counted as tax evasion,” says Dimian.

“This new regulation will create a better linkage between economic growth and tax receipts. We don’t expect 100 per cent compliance by day one, but we should see a rising trend of compliance over the coming two-three years.”

The parallel economy, which accounts for a large number of Egyptian workers, will be excluded from the new measures. “There are certain groups that are known to not be invoicable, such as casual workers and street newspaper sellers, and they are excluded,” says Dimian.

The government plans to reduce the budget deficit to 7.9 per cent of GDP in 2010-11 from an estimated 8.2 per cent in 2009-2010. The new budget will come into force on 1 July.