In the fine print
THE LATEST draft of the new real estate tax bill is the most appealing and least controversial, as Sherine Abdel-Razek finds out. With five earlier versions triggering too many reservations among parliamentarians, businessmen and ordinary citizens, the new version of the property tax bill discussed in the People's Assembly last week is less contentious. Decreasing the property tax from a whopping 46 per cent to 14 per cent was the main attraction Minister of Finance Youssef Boutros Ghali used to promote the law at its inception one year ago. However, by the time the idea was written up in black and while in the form of a draft law, the devil lay in the details.
The first draft presented to the Shura Council last month levies a 14 per cent tax on all residential, commercial or industrial units with a market value exceeding LE250,000. Amid a boom in the real estate sector and rising costs for construction materials, the LE250,000 benchmark was seen as too low because it would include residential units belonging to the low to middle income brackets. Market researches put the average price per square metre in Cairo at around LE3,000-8,000.
The bad timing of introducing the first draft also added to its unpopularity. It came only a few weeks after recent measures by the government which pushed the price of food, transportation and private education tuition fees higher.
On 5 June, the Budget and Planning Committee at the People's Assembly introduced additional amendments to the bill. This came after the approval of the Shura Council a week earlier, which had discussed and amended the draft during five sessions.
The final version increased the value of exempt units to LE550,000 and cut the tax rate to 10 per cent for those valued higher than the cost of maintenance per unit, which is subtracted from its rental value, was raised to 30 per cent for residential properties and to 32 per cent for commercial units. The committee also provided tax exemptions for hospitals, political party headquarters and educational buildings.
The taxable value is calculated by estimating the rental value of each unit and subtracting the maintenance cost as a percentage of the rental value. In other words, the tax rate for residential and commercial properties will be seven per cent and 6.8 per cent of their rental values, respectively. For example, the tax levied on a flat priced at LE600,000 will be LE4,200 annually.
"Now it looks much better, and complies with what Ghali said when he initially talked about the law," according to Magdi Sobhi, senior economist at Al-Ahram Centre for Political and Strategic Studies. "It is now based on taking money from affluent residents and giving it to the poor." Sobhi added that raising the exemption threshold to LE550,000 means that the law truly exempts low and middle income brackets. He believes that since houses built before 1996 are exempt from the new law, the fears of residents in old units in high-end areas such as Zamalek and Heliopolis are no longer valid.
But Sobhi cautioned that it was still too early to judge the fairness of the law, "because a problem could lie in evaluating the unit according to which the tax will be calculated." Singing the praises of the new law, however, Ghali was quoted as saying that it is the first to take into consideration "social justice". The official added that the government will pay the tax on behalf of any citizen if research reveals they are unable to do so.
According to the law, a committee including representatives from the Ministry of Housing, the tax authority and a resident from the area will estimate the value of the unit every five years. The law allows for a maximum increase of 35 per cent in property value between appraisals, and does not mention the possibility of a decline in value. "So will this appraisal committee take into consideration fluctuations in real estate prices during the five years?" wondered Sobhi.
Also, while the 10 per cent tax rate is considered low by many -- especially when compared to the previous proposals of 14 and 12 per cent -- "it is still considerably high in comparison to the average five per cent levied worldwide," revealed Sobhi.
Altogether, the new bill did not calm the concerns of commercial and industrial unit owners. Since they already pay an income tax on their profits, they feel it is unfair to pay another tax on the units.
The law is yet to be approved by the majority of the People's Assembly, expected before the end of this month, and will take three years from its approval to be implemented. According to Ghali, the new tax will yield LE1 billion in revenues in the first year of implementation, and LE5-6 billion annually in successive years.