VAT Said to Spark Smuggling

The government may be inadvertently encouraging increased smuggling of automobiles from Thailand by its combination of a new value-added tax with high import tariffs, according to economic analysts.

The VAT is generally viewed by officials as a success—account­ing for more than 60 percent of government revenue collected during the first half of 1999.

But it has nearly stalled the sales of local automobile distributors, who claim their customers are looking toward the Thai border for cheaper prices—often for larger, rugged vehicles such as the Toyota Land Cruiser.

A tariff structure favoring smaller, more fuel-efficient vehicles forces dealers to pay dramatically higher duty taxes—between 90 and 120 percent of the vehicle cost plus insurance and freight charges—on larger pickup trucks and sports utility vehicles.

With the VAT included, the end result is an expensive vehicle that is likely not to be sold from an authorized dealer’s lot, according to distributors.

“I don’t know where they [the Toyota Land Cruiser] come from, but nobody’s buying them here,” TTHK Co President Nakahara Tasumasa, Phnom Penh’s exclusive dealer of Toyota vehicles, said of the seemingly omni­present sports utility vehicles seen on the city’s streets.

Though smuggling on the Thai-Cambodian border is under control, according to Cambodia’s Deputy Director of Customs Ly Rithy, the VAT’s introduction added more incentive than before to seek out duty-free goods and materials, a Thai official said.

While Cambodia has set up border checkpoints to combat the passage of illegal goods into the country, Thai authorities and analysts say these are easily bypassed with a bribe, though the total amount of goods smuggled has decreased.

The result in a country where only an estimated 200 businesses are paying VAT is a market where legitimate companies—often backed by foreign investors —struggle against “fly-by-night” importers from the border, said one former government adviser. who did not want to be identified.

Most agree the new 10 percent VAT could be a boon for the economy, but analysts say it remains largely mismanaged and is inequitably applied only to larger businesses, including the auto distributors, which one analyst described as the “big white whales” of Phnom Penh “too visible to get away from the tax.”

The government had planned to lower tariffs when the VAT came online but has yet to do so, according to Senaka Fernando, manager of the accounting firm Ernst and Young.

“Unless that happens, goods are still going to come across the border,” he said. “Legal importers will continue to lose against smugglers. Everyone is losing here, from heavy equipment dealers to food item importers.”

Though concessions were made on the import of propane gas, import duties have not been lowered for any other goods, said Kong Vibol, secretary of state for the Ministry of Finance.

“We are still working on it but we are not on deadline yet,” Kong Vibol said. “Maybe in a few years.”

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