Vietnam’s planned environmental tax hike under scrutiny for lack of transparency

The finance ministry’s proposal to raise environmental taxes to the highest level permitted for fuels has been met with criticism from other ministries, industry experts and economists, who are calling for a thorough impact assessment and greater transparency. 

Under the proposal, which is currently reviewed by the legislative National Assembly, petroleum tax will increase by 33 percent to VND4,000 (17 cent) per liter and diesel tax by 33 percent to VND2,000 per liter.

The finance ministry argues the tax would encourage consumers to switch to more environmentally friendly and energy efficient alternatives, effectively reducing pollution and carbon emissions.

But the transport ministry argues that since the government is already taking measures to encourage consumers to switch from gasoline to biofuels, the additional tax would just distort prices. 

The ministry is also concerned that the tax on fuels could cancel out the government’s efforts to boost the transport sector. It hence called for a careful policy impact assessment and suggested a more gradual introduction of the tax. 

Industry representatives have also voiced their concerns, saying the policy would cause them heavy losses. 

“Currently, supply exceeds demand in transportation business,” Bui Van Quan, chairman of HCM City Transport Association, told local media. “Transport companies have been considering asking the state to lower the tax to offset the loss. But with the additional VND4,000 per liter tax, many companies might go bankrupt.”

Timber traders, meanwhile, said they have already finalized sale prices for the year so any increase in tax would hurt their profits. 

If passed by lawmakers, the new taxes will be applicable starting July 1. 

According to preliminary calculations, the increase of environmental taxes may raise inflation in July by 0.27-0.29 percent compared to July and 2018 inflation by 0.11-0.15 percent. 

Household consumption may fall proportionately to their income if the proposal goes through, local media quoted Nguyen Van Phung from the General Department of Taxation as saying. 

As an example, he said low-income groups would spend  VND22,000 more a month, while the high-income group will spend roughly VND130,000 more a month.

However, experts said that the finance ministry’s calculations do not fully reflect the big picture since gasoline prices affect other commodities, creating a chain reaction.

On the revenue side, economist Pham Chi Lan said the public will happily pay the environment tax if the government is transparent on how the tax money is being spent.

“When you raise environmental taxes, you have to show how that would improve the environment, instead of keeping things in the dark like now,” Lan said. “Or is it because the state budget is shrinking and so you need to find new sources of revenue?”

Last month, Deputy Finance Minister Vu Thi Mai said in a statement that the government is aiming to keep its public debt below 65 percent of its gross domestic product, and the new tax will be used to pay that debt.

The proposed hike is expected to add VND14,368 billion (nearly $631.5 million) to Vietnam’s national budget.

The statement said the tax hike will compensate for a decline in import and export tax revenues as Vietnam integrates further into the global market.

The country has signed around a dozen free trade agreements that will remove or reduce taxes on imports.

Fuel is a major source of revenue for Vietnam. Import tariffs from fuel, which are paid by local businesses, now account for around 7 percent of the state's income, according to the petroleum association.

Vietnam gained VND42.4 trillion in revenue from environmental protection taxes in 2016, jumping nearly 57 percent from 2015.

During the same period, spending on environmental protection reached just VND12.3 trillion, accounting for 29 percent of the tax revenue.