The government plans to exempt garment makers from the controversial Value Added Tax, a move that could cost millions of dollars in tax revenue, industry officials say.
The garment industry, the country’s fastest-growing sector, will be exempted from the 10 percent tax if finished products using imported raw materials are exported within three months, said Roger Tan, secretary-general of the Garment Manufacturers Association. If not, the materials will be subject to the tax, he said.
“We’re happy about this decision,” Roger Tan said. “It will keep the garment industry alive.” Based on his estimates of the volume of raw materials imported, the government could lose out on $27 million of tax revenue.
Chea Sophan, secretary of state for the Council of Ministers, confirmed the government is finalizing a tax break for the garment industry and the Council will meet today to discuss it.
But neither he nor other officials contacted from the Finance Ministry and the Council of Ministers would discuss the details of the exemption.
Tan explained the import of raw materials accounts for 75 percent of the industry’s export volume, which is estimated at $360 million in 1998.
That means $270 million of raw materials are imported each year. If taxed at 10 percent, that would account for $27 million of tax revenue.
Garment industry sources said that the manufacturers association received a document on the tax break after last Thursday’s inter-ministerial meeting. Mao Thura, managing director of cabinet in the Commerce Ministry, confirmed that the tax exemption for garment manufacturers was the topic of the meeting.
Textile exports have increased from $26.5 million in 1995 to the estimated $360 million in 1998, according to the Ministry of Commerce.
But with a new US-Cambodia textile treaty signed last Wednesday, exports are expected to remain at the current volume or slightly higher in the next few years. The agreement sets quotas on 12 different kinds of textile exports to the US.
The Value Added Tax is considered one of the country’s key reforms to increase tax revenues.
Like other service and goods providers, textile manufacturers were originally required to pay VAT on their raw materials and then claim a credit from the government.
The manufacturers lobbied hard for a tax break, claiming that the new tax would threaten their viability.
“This move is very important to the national economy,” businessman Ted Ngoy said. “Manufacturers have feared they might need to close their factories and clear off their containers. It would have caused a social chaos. The tax exemption will encourage foreign investors to do business in Cambodia.”
It was unclear Tuesday, however, how international donors will greet the tax exemption. Cambodia has one of the worst tax-collection records in the world, and has been under pressure from international donors to improve dramatically.
The tax break comes just a month before international donors are scheduled to meet in Tokyo to decide on critical aid packages to Cambodia.
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