Tax Department Delays VAT on Microfinance Institutions

The Finance Ministry’s general department of taxation will delay implementing a new provision meant to clarify financial services for which the value-added tax (VAT) is required, after microfinance institutions voiced concerns about the burden it would entail.

The department would “continue to cooperate with the private sector in order to review and study in detail the definition of ‘primary financial services’ and the implementation of VAT on non-primary financial services,” the department said in a statement dated Thursday.

Prakas 559, which was issued on May 25, excludes “service fees related to the provision of credit or loan” as non-taxable financial services, which would suggest fees associated with microfinance loans would be subject to a 10 percent VAT.

In deciding to temporarily suspend the measure, the government and the taxation department had particularly “heeded the concerns and extreme difficulties faced by the private sector in implementing VAT for financial service,” Yun Sovanna, Cambodia Microfinance Association’s general-secretary, said in an email on Thursday.

Mr. Sovanna said the organization hoped the private sector would be consulted about new regulations in the future and that officials “might consider relieving the burden of the people who [are] financial institutions’ consumers and would otherwise ultimately pay for the VAT.”

Stephen Higgins, a managing partner of investment and services firm Mekong Strategic Partners, said in an email last week that suspending the regulation was sensible as banks and MFIs would need to invest heavily in IT in order to properly process VAT on service fees—a cost that would likely be passed on to customers.

The National Bank of Cambodia would surely “rather see this investment going into things like digital financial services, which would help financial inclusion, improve customer service and deliver a more efficient financial sector,” Mr. Higgins said.

(Additional reporting by Kim Chan)

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