Vietnam’s ministry back on track with proposal to raise VAT

By Minh Nga   January 5, 2018 | 01:32 am PT
Vietnam’s ministry back on track with proposal to raise VAT
A man transports instant noodles to a market in Hanoi. Vietnam's Ministry of Finance is seeking to raise the country's VAT to 11 percent next year. Photo by Reuters
Its suggestion to raise the tax came out last year and faced strong opposition.

Vietnam's Minisitry of Finance is once again looking to raise value added tax (VAT) to 11 percent from 2019 and then to 12 percent by 2020 from the current 10 percent.

In August last year, the ministry proposed raising the tax from 10 to 12 percent, starting from 2019.

This time, the reason for the tax increase is just the same: Vietnam’s public debt is rising while raising VAT is in accordance with international norms, the ministry said in a draft proposal.

The average tax rate in European Union countries was 19 percent in 2000 and 21.5 percent in 2014.

It was 18 percent in 2000, 19 percent in 2014 and 2016 in Organization for Economic Co-operation and Development (OECD) countries, the ministry said.

But if the proposal is approved, Vietnam will have the second highest VAT rate in Southeast Asia, only after the Philippines, where goods and services are levied at 18 percent.

The ministry also pointed out several countries that have the same or lower annual incomes per capita compared to Vietnam but are imposing higher VAT, such as Pakistan with 17 percent, Sri Lanka and Bangladesh 15 percent and Nepal 13 percent.

Last year, the ministry asked to increase a number of different taxes and fees, including the VAT, and its proposed 2-percent VAT hike triggered a heated debate among economists, policymakers and businesses.

The ministry said the raised tax will make up for government revenue losses when Vietnam fulfils its commitment to cut import tariffs under free trade agreements, and help tackle rising public debt, insisting that Vietnam's VAT is still low.

The World Bank previously forecast that Vietnam’s public debt would climb to 64.4 percent in 2017 and 64.7 percent in 2018.

The final official result showed the debt at VND3,100 trillion ($136.5 billion), a rise of VND300 trillion against last year, or 62.6 percent of the country’s gross domestic product (GDP), down 1 percentage point against 2016 and lower than the target by 2.2 points.

But some experts and analysts believed that the increase will have a negative impact on consumption considering the slow improvement in purchasing power witnessed in recent years.

“I have to say that there is no such thing as an 'international practice' for VAT. Rates vary from 5 percent in Taiwan to 25-27 percent in most European Union countries. In Southeast Asia, VAT ranges from 7 percent in Thailand to 12 percent in Singapore and 17 percent in China,” Vu Thanh Tu Anh, an economist at Fulbright University in HCMC, and research fellow at the Harvard Kennedy School, said in an opinion piece published on VnExpress.

The 10-percent rate in Vietnam is around average in the regional context, and not as low as the finance ministry has described, Anh argued.

Also, economic theories prove that when a tax is raised, both producers and consumers have to spend more, which reduces economic efficiency, he said.

The Vietnam Chamber of Commerce and Industry (VCCI) in October last year also strongly opposed raising the VAT.

In a letter to the ministry, the VCCI said essential products cost just the same for low-income and high-income earners. Therefore, when VAT is raised, the burden is heavier on low-income earners as they have less ability to pay.

"Regarding the social impact, higher VAT will enlarge the rich-poor divide and lead to unpleasant repercussions for society,” it argued.

In addition, raising VAT will decrease consumption demand, which could affect economic growth.

World Bank economist Sebastian Eckhardthowever, argued that the currently "low" VAT benefits the rich more than the poor because "richer households tend to consume more and more expensive goods, they pay most of the VAT."

The World Bank estimated that 20 percent poorest households only account for about 9 percent of the total VAT revenue. In contrast, the 20 percent richest households pay close to 40 percent of the total VAT.

"Any debate on distributional issues needs to focus on the entire tax and benefit system, and not just on one tax in isolation," he said. "There are often better ways to provide targeted redistribution to poor households on the expenditure side, including by spending on health and education and infrastructure that benefits the poor."

Eckhardt also stressed that VAT should be considered as part of the overall tax reform and restructuring and given that Vietnam faces significant investment needs in infrastructure, health and education, "steps are needed to boost domestic revenue through tax reforms."

After the ministry's proposal last year, the government in September requested a suspension on a series of proposed tax hikes to make life easier for local businesses and the growth target more achievable.

Eventually, the result turned out to be larger than life when Vietnam’s economy expanded by 6.8 percent in 2017, which is slightly higher than the initial target of 6.7 percent and the highest rate to be recorded in the past decade.

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