Egypt may fortune from its property tax, but analysts say that the anticipated reform must first weather a crumbled taxation system that fails in the collection process. Invest-Gate looks into the effects of Egypt’s property tax law.
According to experts, the Egyptian government has failed to collect a targeted property tax amount of EGP 2.5 bn since a real estate tax law was amended back in 2014.
“The government does not have a proper database for the country’s real estate wealth and has been saying that it is still setting it up since the last amendments introduced to the law about two years ago,” Ahmed El-Shami, an economist and a real estate expert, tells Invest-Gate.
In August 2014, Egypt’s President Abdel Fattah El Sisi ratified the amendments to the property tax law, which covered articles on the maximum limit in raising a property’s valuation, exemptions, and forming assessment committees.
The amended real estate tax law replaces a 1954 law, which applied to only about a third of the properties in Egypt, according to data released by the Real Estate Tax Authority published on its official website. The existing law applies to almost all properties in the country. Under the old law, real estate was taxed at a 46% rate but was unevenly applied and evasion was common, the same data showed.
A key element of the current tax law is that it is levied not only against completed buildings, but also against under-construction projects to encourage the completion of projects and the sale or rental of empty units.
The prior real estate tax exempted unfinished construction from the tax, and as a result, many buildings in Egypt have an unfinished top floor that has been “under construction for decades, which is used as justification for tax exemption,” El-Shami says.
However, the existing law has not been put into effect with experts confirming that the property tax collection process is a failure.
Data released by the Tax Authority show that the government collected EGP 1.095 bn in property taxes in the first seven months of the fiscal year 2016/2017. “The tax amount being collected are very meager and the government has to push it up,’ economist El-Shami claims.
“In addition to bolstering state finances, the tax – if regularly collected – could curb property bubbles and bring more of the country’s estimated 1.2 mn empty homes into the market,” he notes. “Levying the tax can be a big boost to the country’s real estate sector,” El-Shami adds.
The property taxation system was brought up for discussion at the country’s parliament last month, with members calling upon the government to present a detailed report about the measures it took to collect property taxes since the law has taken effect.
“The government should set out a new well-knit vision on collecting property taxes,” Hussein Essa, head of a parliamentary plan and budget committee, says. He adds that the government has been failing to collect taxes because it has been struggling with setting up a solid database of properties in Egypt amid a rising number of illegal buildings.
Essam also notes that the tax amount now being collected is very low, calling upon the government to increase it. He says, “The government should collect more than the targeted EGP 2.5 bn.”
“Increasing the amount of real estate taxes would boost the national economy, reduce the country’s budget deficit, and inject more money into the state’s coffers,” Essa elaborates.
Fathallah Fawzi, a real estate expert and developer, reckons that it is better for the government to put the existing law into effect rather than increase the taxes.
“The effectuation of the property tax law could tame potential property bubbles in Egypt by pushing owners to rent out unused units and discourage investors from buying real estate purely for profit,” Fawzi believes.
“Putting the law into effect would be a big push for the national economy. But the government has to know how to set up a proper database and successfully run the system,” he adds.
Experts believe that the property tax can be more like a goose that lays golden eggs as construction adds hundreds of thousands of units every year in the most populous Arab country of 93 mn; but it all depends on whether the government will set out a successful strategy for collecting the taxes or not.