Of course [the proposed VAT] is something to be concerned about.
CUSTOMERS of Electricite du Cambodge (EDC) in Phnom Penh and five other provinces would pay a new value-added tax (VAT) on electricity consumed beginning March 1, under a new plan proposed by the Ministry of Industry, Mines and Energy at a meeting on Monday.
Ministry officials say the new tax, the rates of which differ from province to province and are adjusted for the scale and type of consumer, will help EDC become self-sufficient following an end to government subsidies of electricity later this year.
Representatives of Cambodia’s business community, however, have voiced concern that the new tax could hinder investment in the country’s export industries, which are struggling to remain competitive in the post-downturn global economy.
Ith Praing, a secretary of state at the ministry, said current electricity prices, which have been in effect since 2006, do not reflect the current oil price on the world market and other input costs for generating power, and thus have been draining revenue from EDC.
“Because EDC is the major power supplier for the national grid, it is crucial that they become a sustainable enterprise that does not need subsidies from the national budget,” he said.
Ith Praing said that a household in Phnom Penh using less than 50 kilowatt-hours per month currently pays 390 riels (US$0.093) per kilowatt-hour, or just over half of the cost of producing the power. With the application of the new VAT, the price for the same household will be 610 riels ($0.14) per kilowatt hour.
Chou Kimleng, an undersecretary of state at the Ministry of Economy and Finance, said that although consumers could face a significant hike in electricity prices, the burden of subsidies on the government’s budget is growing even faster.
“From 1999 until 2006, the government spent about 158 billion riels (U$37.7 million) subsidising the EDC. Since 2007, the government has already spent $36 million,” he said.
Commercial consumers of electricity say they are concerned that the new VAT – which in addition to Phnom Penh will affect Kandal, Kampong Speu, Takeo, Preah Sihanouk and Kampong Cham provinces – would only drive up production costs at a time when the competitiveness of Cambodian industries is at a historic low.
According to a December 2009 International Monetary Fund report on Cambodia’s garment sector, “Competitiveness in Cambodia is hampered by several factors, mainly lower productivity, unreliable supply and high cost of electricity (about 15 percent of total cost).”
Nguon Meng Tech, director general of the Cambodia Chamber of Commerce, said he hoped the government would reconsider its position on taxing EDC’s industrial customers.
“If they apply this across the board, it could be very problematic. It will make it even harder to get investors to come here to do business,” Nguon Meng Tech said. “But maybe the prime minister will take a good look, along with Deputy Prime Minister [and Minister of Finance] Keat Chhon, in order to come up with a solution. Otherwise, we won’t be competitive with neighbours like Laos and Vietnam.”
Ken Loo, secretary general of the Garment Manufacturers’ Association of Cambodia, said that one such solution would be to give recovering industries a reprieve from the new tax.
“Of course, this is something to be concerned about.… In all possibility, we will try to approach the government for a waiver or an exemption, at least on a temporary basis,” he said.