Abstract

Since July 2004, the Egyptian governments have tended to continue its economic reform program with targets for increasing economic growth and promoting employment level. One of the main pillars of this economic reform is the fiscal policy reform. Consequently, the Egyptian Ministry of Finance is aiming to modernize the tax system; one of the important steps is to replace the Value Added Tax (VAT) system instead of the current Egyptian Sales Tax (EST).

Therefore, the study discusses the structure of the Sales Tax in Egypt that causes crucial problems such as economic distortions, tax cascading, and inequity of the tax system resulting from excluding several activities, especially in services, from the Sales Tax. Consequently, the first step to implement VAT in Egypt is to calculate the VAT base. Thus, the study chooses to calculate the VAT base using both production and consumption methods.

The results seem to be significant and reasonable with a small difference in estimations between the two methods reaching only 2.9% of GDP according to data for the fiscal year 2006/2007. Finally, the study recommends the new VAT system to use the consumption-type VAT based on the destination principle and using the invoice credit method and to have 8% standard rate, instead of 10% under EST.

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