With just six weeks left until the new value-added tax comes into effect, the last-minute government decision to move ahead with the VAT has created confusion and concern over the possible impact.
But tax experts and analysts this week recommended calm, calling the new tax a positive step for businesses. Consumers should not be greatly affected either, although concerns remain that implementing the VAT during the current economic downturn is badly timed and will hurt Cambodia’s poorest. But ultimately, they said, the success of the tax rides on whether the government can properly implement and monitor it.
The VAT, set to go into effect Jan 1, is a 10 percent tax on the estimated market value added to a product or material at each stage of its manufacture or distribution. The manufacturer or distributor can claim a credit for the VAT it paid for the product, so it is the final consumer of the product who bears the burden of the tax.
Just how big that burden may be is unclear, but tax experts say shoppers do not have to worry that they will see a 10 percent price increase on Jan 1.
The prices will not rise 10 percent because the VAT replaces taxes which were previously hidden in the cost, said Alfred Grayston, a World Bank-funded consultant to the Finance Ministry.
Instead, Grayston said, consumers can expect a one-time increase of between 1 percent and 3 percent when the tax is implemented.
“Prices should not go up significantly,” agreed Senaka Fernando of Ernst & Young. “But the longer the chain the product passes through, the higher the price will rise.”
PricewaterhouseCoopers senior tax manager Tim Watson said Tuesday that Cambodia’s poorest are unlikely to feel an impact because they buy their food and staple goods from markets, where the tax won’t be applied.
But Cambodian Development Research Institute economist Toshi Kato said it would probably have some sort of impact on consumer spending, which Institute studies have shown is significantly down compared with the first half of 1997. “It’s a necessary thing to do,” he said of the VAT. “But the timing is unfortunate.”
Several Phnom Penh residents interviewed Tuesday said they were concerned it might make their lives more difficult and that prices were high enough already. But others supported the idea.
“I am happy and I hope that my salary will be paid on time now,” said Bun Rithy, a civil servant. “I have not been paid for two months because the government has no money.”
Finance Undersecretary of State Ngi Tayi said Tuesday that the government considered the current economic situation before deciding to go ahead with the tax on Jan 1, a year later than scheduled. But the VAT is an important measure to broaden the tax base, he said, especially since key customs revenues will drop once Cambodia joins Asean and its free trade area. It is also one of the reforms pushed by donors.
“The timing is not very right,” he said following Tuesday’s seminar, “but if we don’t do it now when are we going to do it?”
Initially, according to the Finance Ministry, 2,000 large firms will have to register with the tax department to pay the VAT. Other businesses may also have to pay depending on their type of activity and their level of turnover, the ministry said.
Some businesses will be exempt, such as banks, medical clinics, postal services, non-profit activities and insurance services. Exporters are in a special category. They will pay VAT on their raw materials but tax payments will be refunded and the exports will not be taxed.
The main benefit of the VAT, according to analysts, is that it replaces the 4 percent turnover tax. The turnover tax cascades through each part of the manufacturing stage but companies cannot claim credit for the tax it paid on the product.
The VAT should also give the country’s export industry a boost, Watson said.
Analysts said no businesses should be hurt provided their competitors also pay the tax.
Despite a well-attended seminar Tuesday morning organized by the Finance Ministry, there is still some confusion over how the tax will be implemented. Some investors contacted Tuesday afternoon said they knew nothing about a VAT and others did not know how it will be implemented.
“At this moment it is too early to speculate [on the impact],” said Chris Ho of the Cambodia Hotel Association, adding he was unclear whether the tax would replace a 10 percent tax on hotels.
The biggest question mark may be whether the government can implement the VAT and monitor it properly. The first hurdle to pass is the Dec 5 registration deadline for companies.
Then, the government must make sure the playing field is level for all taxpayers, said Fernando. Multinationals paying the tax will only be hurt if smaller competitors evade the tax payers.
Most importantly, said Watson, it remains to be seen whether the government will be able to refund money to companies within the time periods stipulated in the law.
“There will be a panic, but people shouldn’t panic,” he said. “It’s a good tax.”