Double Edged Impacts

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PHNOM PENH: March 9, 2014: (Khmer Times) – The government’s determination to strengthen the country’s excise tax collection has seen an increase in national revenue.

However, economists and traders say the campaign has resulted in a double-edged influence on the economy, i.e. the short-term negatives and the long-term positives.

To the immediate negative side, product and service providers, and end-users all have felt the pinch due to sudden price hikes, but later on after the market is properly restructured, inspired by legal tariff collection system, the campaign will form a level playing field for all  players and this will  benefit the country in the long-run.    

In Cambodia an importer has to pay three types of taxes: customs import duties, excise tax for specific goods and value added tax (VAT). 
For primary products and raw materials there is a 7 percent tax, for machinery and equipment the tax rate is 15 percent, for finished products and government-protected goods the rate is 35 percent and luxury goods are taxed at a rate of 50 percent. The value added tax is a flat 10 percent on top of the other taxes.

Tax collection enforcement at other countries may sound ordinary, but in Cambodia where ‘transparency’ is still weak the news has shaken the markets. 

The fact is that as ‘some’ goods traders and suppliers can partially evade tax  previously  due to corrupt practices that allow them to sell the goods at lower prices, now they need to pay full tax  This causes a hike in product and service prices that affects every industry like a series of dominoes. 

“Before some unscrupulous goods importers paid between 30 and 50 percent of the official taxes only and gave bribes to corrupt customs officials in order to enable their goods to enter Cambodia, but now such practices are no longer usable,” says a trader in anonymity. 
The tariff enforcement came after the reshuffle of senior customs and excise officials at the General Department of Customs and Excise late last year.

To meet the legal tax charges, vendors noticed that prices rose on about half of imported goods by about 20% or more, especially food staff.
 
Short-term negative hits

Chan Sophal, Spokesman of the Cambodia Economic Association (CEA) says that such sudden rigid tax enforcement has hit the country’s macro-economic context in the short-term due to sudden price hikes. 
“Assuming goods are properly taxed after not being done  so for some years, their prices are likely to rise, which is the effect of the passing on the  tax to buyers or consumers,” he said. 
The tax enforcement is also likely to edge up the nation’s inflation rate, he added. “..In theory, the inflation rate in 2013 should be higher than in 2012 because of the strong enforcement of import taxes.”

But Peter Brimble, senior country economist at the Asian Development Bank said late last year that it was too early to tell if the tax enforcement will increase the country’s overall inflation rate. “There needs to be some sort of continuous change in order to see an inflation rate increase.”
One of the most suffering sectors is the construction industry as building professionals noticed about half of the building materials edged up pricing that had negative impacts and consequences on on-going projects nationwide. 

Varheng Dawuth, Managing Director of Camcona Group Co., Ltd, a local constructor complaints that building firms are one of the most affected business from such tariff collection enforcement as they  have to bear with the rising building cost alone, when the agreed budget contracted with client can’t be compromised.

“Builders earn on the average between 3% to 7% of the total budget they get from clients after they pay everything like building materials and labor. If the materials cost rises, our revenue will reduce or even result in losses,” he said. 

In Cambodia, most infamous brands or copy products don’t usually pay the tax, unlike international brands that producers require distributors to pay the tax properly. Here, what he worries is that not all goods vendors and suppliers pay the taxes when they increase the price. 

The tax enforcement has also reportedly hurt the service sector as complained by many service providers such as those in the accommodation, food and beverage businesses who resort to increase their price tag due to surging cost on raw materials and food staff. 

Luu Meng, president of the Cambodian Hotel Association complained that the hotel operators are being affected by the rising goods price in the market which results in reducing profits. He believes that prices would likely continue to increase gradually until the first half of this year. Meng is considering increasing his rates as well to cope with the rising cost. 

The tax collection reform has caused a gridlock of goods at the borders as importers had to adapt to the new procedures and that is why some logistic companies, Chinese enterprises and dealers warn of a shortage or late delivery of goods supply inside the country. 
 

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