As Cambodia prepares for possible Asean membership, two senior finance officials are urging the government to push ahead with tax reform to make up for lost revenue expected when free trade initiatives take effect.
“[Finance] reforms are currently at a slow pace and the government needs to demonstrate a strong commitment to undertake these reforms,” Finance Minister Keat Chhon and Senior Economic Official Aun Porn Moniroth write in a book released last week called “Economic Development of Cambodia in the Asean Context.”
Cambodia, if admitted to Asean this year, would have to lower rates on import duties to 0-5 percent by 2009 as part of the Asean Free Trade Area (AFTA). Asean ministers will decide next month whether to speed up the process, which would mean Cambodia would lower duties by 2006. The six more developed Asean members—Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand—would have until 2000.
The AFTA initiative should make Cambodia and other Asean countries more attractive to investors, but it also means Cambodia will suffer from a drop in revenues from import duties.
Sixteen products that bring in the most revenue, including petroleum, cigarettes and automobiles, initially will be protected, but customs revenues still are expected to fall substantially.
Senior government officials, however, believe that rather than hurting Cambodia, the acceleration of AFTA could force Cambodia to move ahead with reforms that are needed anyway.
“No other country in the world is like this,” a senior Finance Ministry official said this week. “We need to find other sources of revenue.”
According to the book, published by the Cambodian Institute for Cooperation and Peace, the government has made progress in reducing its dependency on customs revenues, which in 1996 accounted for 65 percent of tax revenues. But it notes much work remains to be done.
The Law on Taxation, passed in 1997, has yet to fully take effect. Finance officials said the most important step is a 10 percent Value-Added Tax (VAT). The VAT was scheduled to start at the beginning of 1998, but the draft law was never completed because of Cambodia’s political crisis.
The VAT would replace a turnover tax that is levied on goods and services, ranging from 1 percent on handicrafts to 10 percent on restaurants and hotels.
The Finance official said the tax department is drafting the subdecree, and that the VAT could be in place by Jan 1. Much depends, however, on the new government, which recently backed off on a substantial power price hike after a public outcry.
“They will decide how far and how fast they want to push this issue,” he said. “There are political considerations.”
The government also must diversify its revenues away from taxes, he said, to such sources as logging and telecommunications. Several state-owned enterprises, such as the power utility Electricite du Cambodge, are also in the red and need to be reorganized, he said.
In the meantime, key preparations for AFTA are still being completed, government officials said. Hundreds of products that will be subject to tariff reductions when Cambodia joins Asean are being reviewed.
Ministries are expected this week to finish reviewing the 24 economic agreements that must be signed when Cambodia officially joins the group, expected to take place in December.
Whether there will be enough time for the National Assembly to ratify the political and economic agreements remains to be seen.
Cambodia was expected to enter Asean in July 1997, but a deadlocked Assembly made it impossible to ratify the agreements. The government was set to sign the agreements and let the Assembly ratify the accords later.
A senior Foreign Ministry official said Tuesday that the same problem is likely to happen again this year. However, despite concerns expressed by both Cambodian and Asean leaders about the legality of the move, the official said, it does not violate the Constitution and the Assembly is unlikely to vote against ratification.