Vietnam’s VAT hike could plunge thousands into poverty

By Nguyen Ha   July 1, 2018 | 01:00 am PT
Vietnam’s VAT hike could plunge thousands into poverty
Hundreds of thousands of Vietnamese might be plunged into poverty if the proposed VAT increase is passed. Photo by VnExpress/Giang Huy
Large households with children and the elderly over 80, as well as people with insufficient education deemed most at risk.

A proposed value-added tax (VAT) increase by the Finance Ministry could push hundreds of thousands of Vietnamese citizens into poverty, experts warn.

The caution was issued at a conference organized on Thursday in Hanoi by the Vietnam Institute for Economic and Policy Research (VEPR).

The Finance Ministry has proposed two options to increase the VAT on goods and services. The first option is to increase the current 5 percent VAT rate to 6 percent, and the 10 percent VAT rate to 12 percent. The second option is to set all VAT rates to 10 percent.

The ministry has said the raised taxes will make up for government revenue losses when Vietnam fulfills its commitment to cut import tariffs under free trade agreements, and help tackle rising public debt.

It has insisted that Vietnam's VAT is still low compared to other countries.

However, experts at VEPR said the proposed tax increase would decrease consumer spending and send hundreds of thousands into poverty.

If the ministry goes with the first option, consumer spending would decrease by 0.89 percent and about 240,000 would go into poverty. With the second option, the corresponding numbers would be 0.32 percent and 202,000.

Large households with children and the elderly over 80, as well as people who are not adequately educated, are most at risk, the experts said.

They also warned that since most of the national budget funds have been used recently for spending and paying off debts instead of actually investing in development projects, the VAT increase would actually decrease social welfare for all households.

The government should think about restructuring property taxes instead to increase budget collection, since these taxes will only account for a small percentage of the national budget revenues.

Furthermore, the government also needs to be more transparent and accountable in how it spends the national budget funds, the experts said.

In a letter to the ministry last year, the Vietnam Chamber of Commerce and Industry had said that higher VAT rates will hit low-income earners the hardest.

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 widen the rich-poor divide and lead to unpleasant repercussions for society,” it wrote.

If the proposal is approved, Vietnam will have the second highest VAT rate in Southeast Asia, only after the Philippines, where an 18 percent VAT is levied on goods and services.

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