Egypt's finance ministry has scrapped plans to impose a capital gains tax on dividend payments after receiving a torrent of criticism from the business community. The plan's many detractors, including the chairman of the Egyptian Exchange and Naguib Sawiris, an Egyptian billionaire businessman, argued the move would be detrimental to the country's economic recovery, particularly in the capital markets. "We sat with them [the finance ministry] and showed them the numbers, and asked for the exemption," said Mohammed Abdel Salam, the chairman of the Egyptian Exchange. He said he showed the ministry officials that the taxes would have generated less than 2 billion Egyptian pounds (Dh1.23bn) in extra revenues while hurting companies' ability to attract investors. "The taxes would deter investors and discourage companies from going public, at a time where the Egyptian economy needs their participation the most," he added. Last week, Samir Radwan, the finance minister, announced a 10 per cent tax on dividend payments, as well as profits earned through mergers and acquisitions and asset revaluations. He also planned to increase income tax to 25 per cent from 20 per cent on individuals and companies earning more than 10 million pounds a year. His goal was to rein in the budget deficit that is soaring as the transitional government spends more on subsidies and employees' salaries to improve living standards. The budget for the fiscal year, which starts next month, forecasts expenditure of 86.5bn pounds, up from 69bn pounds last year. The country's deficit is expected to widen to 10.9 per cent of GDP from 8.6 per cent this year. Expenditure on public sector salaries is set to rise by 20 per cent. Fuel subsidies, which account for almost a fifth of government spending, have also gone up by 32 per cent to US$16.6bn (Dh60.97bn). Food subsidies rose 26 per cent to $3.76bn. The exemption agreed to yesterday will apply to all of the 228 companies listed on the exchange, Mr Salam said. In advance of the announcement, Mr Sawiris had called the proposed capital gains tax a "disaster". "We have explained our point of view to the ministry of finance," the founder of Orascom Telecom Holding told Bloomberg News. "The press also has been really supportive and the head of the Cairo stock exchange was a very brave man and expressed his concern." Traders said reports the government would impose a dividend tax helped to depress share prices over the past week. Egypt's benchmark lost 0.7 per cent to 5,402.15 points yesterday. The EGX 30 stock index is down 15 per cent this year, making it the world's worst performing measure. "Their turnaround in their thinking is progressive, I am glad they rectified it," said Haissam Arabi, the chief executive of Gulfmena Alternative Investments in Abu Dhabi. "While they need to balance their fiscal requirements, they do need to rely on foreign direct investments at the same time."
