Input tax is the tax borne by the taxpayer when purchasing or importing goods (including machinery and equipment) and services, whether directly or indirectly related to the sale of goods or provision of taxable services. The taxpayer is allowed to deduct this tax up to the amount of tax due and carry forward any excess to subsequent tax periods until fully deducted.
Input Tax is Fully Deductible in the Following Cases
- Tax paid on sales returns.
- Tax paid on:
- Inputs of goods and services, provided all sales are taxable.
- Purchases made for trading purposes.
- Tax paid on imported goods and services.
- Sales of goods and services exempted by law.
- Sales of goods and services to specific entities as per regulations under Law 67 of 2016.
In Tax deductions be made in subsequent tax periods, Sometimes, the issuance date of an invoice may be delayed relative to the supply date, but as long as the company is committed to issuing electronic invoices, it may deduct the tax in subsequent tax periods.
Proportional Deduction
If some of the registered sales of goods and services are taxable while others are exempt or subject to a specific tax rate, input tax related to taxable sales is deductible only in proportion to the taxable sales amount relative to the total sales.
Cases Where Tax Deduction Does Not Apply
- Table Tax: Tax calculated based on fixed rates.
- Input Tax Included in Cost: Tax already included in the cost of goods and services.
- Exempted Goods and Services: Goods and services exempted from tax.
- Cases of Simplified Taxpayers Registration: Cases where taxpayers are registered under simplified procedures.
When selling new goods that the taxpayer previously used domestically under specific conditions as per regulations, provisions for tax deduction do not apply if the full tax amount due at the time of purchase was not fully deducted.
Tax Benefits of Compliance with Tax Deduction
- Reduced Final Tax: Deducting input tax helps reduce the final tax burden on products or services sold to the end consumer. Companies can levy tax only on the value added by them after deducting the tax paid on materials and services used in production.
- Enhanced Competitiveness: By deducting input tax, Egyptian companies can maintain lower production costs, making their products more competitive in both domestic and international markets. This, in turn, enhances Egypt's export capability.
- Encouragement of Investment: Input tax deduction enhances Egypt's attractiveness as an investment destination by reducing production costs for companies operating in the Egyptian market. This encourages both domestic and foreign investments, contributing to economic growth and creating new job opportunities.
- Improved Tax Efficiency: Input tax deduction improves overall tax system efficiency by reducing disparities in taxes borne by producers at different production stages. It helps minimize tax evasion and enhances tax compliance.
Input tax deduction is a fundamental part of Egypt's strategy to boost economic growth and industrial productivity. By stimulating investment and improving the business environment, Egypt aims for sustainable development and strengthens its position as an emerging economy regionally and globally.
In all cases where a tax deduction is legally provided, the deduction is only recognized if the registered taxpayer submits an annual certificate signed by a certified accountant confirming their entitlement to deduction unless tax payment is electronically confirmed by the tax authority.
Conclusion
Egypt's Value Added Tax Law No. 67 of 2016 is among the most significant tax laws impacting the Egyptian economy. Its principle of input tax deduction must be consistently observed to safeguard business rights (local or import) and maximize tax deduction within legal boundaries, thereby avoiding tax challenges resulting from non-compliance and ensuring optimism and increased liquidity for stakeholders.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.