Cambodian workers, especially those in the garment industry or employed by the government, can expect a little extra cash on hand next year as the National Assembly reviews draft legislation that would raise the lowest taxable income threshold from $200 to $250.

Mey Vann, director of the financial industry department at the Ministry of Economy and Finance, said the proposed tax amendment – expected to pass and come into effect in January – is necessary to close the gap between low-income and high-income earners.

“The tax amendment is aimed to incorporate a policy that balances different income levels,” he said. “The increase from $200 to $250 will mostly affect the lowest salary earners like government employees and garment workers, so we decided to amend the tax so that they can avoid being taxed.”

Clint O’Connell, head of Cambodia Tax Practice for foreign investment advisory and tax firm DFDL, explained that under current law, taxable income kicks in for anyone earning over $200 a month at 5 percent. The amendment would raise this threshold to $250, while pushing the top of the income tier to around $375, from $312.

While raising the higher threshold will likely put a small dent in the government’s coffers and operating flow, he said that the reform should “provide some additional breathing space” for Cambodians on the lower side of the income spectrum.

“The increase in the tax band effectively results in workers who earn $250 per month receiving an additional $2.50 in the hand that would have otherwise been paid by their employers to the tax authorities as tax on salary,” he said.

Coupled with the General Department of Taxation’s announcement in October that the fringe benefit tax – part of an employer’s monthly salary tax obligation – would be reduced from 20 percent to zero across all industries, O’Connell believes this “should encourage increased compliance for those employers who are transitioning into the formal regime of taxation”.

While an extra $2.50 per month may not seem like much, Michael Gordon, a partner at tax firm KPMG Cambodia, said that any benefit given to low-income earners was a progressive step. “Any move to decrease the tax burden at the lower levels is welcomed,” he said.

“Increasing the levels of salary before tax is applicable is a welcome move.”

This will be the second time in the last two years that the government has raised the tax threshold for low-income workers. The move is seen as complementary to hikes in the minimum wage, which was raised to $153 a month in September, and increased basic living costs.

Rath Minea, acting president of the National Independent Federation Textile Union of Cambodia (NIFTUC), said the proposed increase in the salary tax threshold was a welcomed reform, especially as many garment workers effectively earn more than the minimum wage when overtime pay is factored in.

He said even small increases in worker hours could easily have tipped them into the $200 a month tax band.

“Even though the tax break is small, maybe only $1 or $2, it is necessary for workers to receive this extra income,” he said.

Additional reporting by Hor Kimsay