Of gold and taxes

An ongoing conflict between gold traders and the sales tax authority is leading the market nowhere, writes Sherine Nasr

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The latest amendment to the sales tax law has triggered a long-standing dispute between the Sales Tax Authority and gold traders. The new amendment aims to impose a five per cent sales tax on a manufactured (final) gold item -- a significant increase from the one per cent tax that has been in place for a few years now.

Gold traders and manufacturers are calling for a 10 per cent sales tax on a gold item's added value, rather than on the piece as a whole. The added value is the cost a consumer pays for the manufacturing process, which varies depending on the final product's quality.

A heated debate at a recent People's Assembly budget and planning committee meeting ended without any of the disputed issues being resolved. The Federation of the Egyptian Industries' Gold Division was asked to submit its proposals to amend the law, as well as a detailed study of gold traders' claims regarding unfair application of the current sales tax.

Mamdouh Omar, head of the Sales Tax Authority's research department, said that even though the "time has come to impose the law in its final form, gold traders are trying to twist facts to gain more profits". Omar said gold traders had openly admitted that they were tax evaders. He was referring to earlier statements made by a number of traders that 80 per cent of the industry, in a desperate attempt to continue operating in the midst of what they called an unfair tax regime had resorted to fraud and tax evasion to survive.

Gold Division head Rafiq El-Abbasi said the traders were making a point. "Gold traders have made it clear to officials more than once that the sales tax in its present form has caused incalculable disturbance to a market that was once stable, healthy and growing." Although the two sides disagreed on several points, El-Abbasi said the most crucial was the question of whether sales tax should be imposed on an item's added value or the item as a whole. Gold is not a disposable material, he said, "as it is used as a form of currency, and by some people as a form of savings". A kilo of gold, he said, may change hands three times in one year. "Is it fair, or rather constitutional, to repeatedly impose a five per cent sales tax on the same sum of gold?"

Gold manufacturer Maher Messiha said for manufacturers, gold is capital, not profit. "It is ridiculous to continuously impose sales tax on our main tool for production." Since the net weight of gold goes down by some 70 grammes during manufacturing's melting and purifying process, he said, "we also have to make up for the loss by buying more gold. This is an ongoing process that adds to the burdens we have to put up with," Messiha said.

According to the Sales Tax Authority's Omar, gold traders were "advocating a lost cause. When a kilogramme of flour is manufactured into biscuits, it is taxed in the same way a kilogramme of gold is manufactured into different gold items."

Gold traders said the authority's analysis conveniently overlooked the fact that biscuits are consumed while gold is not; that discrepancy has also been at the heart of the distrust, misunderstanding, and lack of transparency between the two sides since sales tax on gold was first imposed in 1991.

In theory, the standard practice has been for one per cent sales tax to be imposed on each gramme of 21 carat gold. An additional 113 piastres per gramme in sales tax are collected once a government authentification body officially stamps the item. "All in all," El-Abbasi said, "LE2 in taxes are imposed on a 21 carat gramme of gold."

The complications, however, arise during application. For one, Messiha said, "gold traders have to pay the tax on spot, even before they sell their product." This creates problems when a technical error, for instance, or incorrect carat rate, might result in improper or incomplete stamping. There is also the issue of pieces that do not make their way off the shelves. "It is ridiculous for traders to pay a sales tax on items that have not, and will not, be sold," Messiha said.

El-Abbasi said the government was asking traders to pay LE2 sales tax per gramme, even though their own profits per gramme were never more than 15-25 piastres. When a great many gold traders decided, in retaliation, to fake the authentication stamps, fraud mushroomed like never before. In 2004, El-Abbasi said, "at least 550 gold workshops were shut down". Still, he said, bringing in "the police is not an answer to this chaos. We are talking business here. Unless the government deals with the issue with great understanding and openness, there is little hope that things will get better."

Many experts also said the stamping authority had to upgrade its anti-counterfeit mechanisms, a LE5 million process that has not even begun.

Meanwhile, the tax authority's Omar said the LE150 million in taxes collected from gold last year represented a "huge sum" that was set to increase with the new tax amendment. Gold traders continued to insist that the law's deficiencies would continue to inspire an atmosphere of fraud. What seems abundantly clear is that neither party is really listening to the other at all.