Vietnam’s business sector seems largely uneasy about what the effects of increasing VAT rates and new SCT targets may be.

The recent draft law from the Ministry of Finance (MoF) amending and supplementing five tax laws, with proposals including value added tax (VAT) increasing from 10 to 12 per cent and a special consumption tax (SCT) being levied on certain types of beverages, has raised a lot of controversy among the people, experts, and the private sector. 

Much debate has been heard at think-tanks and law firms about why the government is keen to collect more tax contributions, what the macroeconomic effect may be, and, more importantly, how much the changes will affect the business community and consumers.

Among a raft of responses, the Vietnam Chamber of Commerce and Industry (VCCI) and MoF held a conference in mid-September to seek feedback on the draft law. 

“These amendments and supplements will influence more than 30 groups of policies and a range of sectors,” Mr. Dau Anh Tuan, Head of VCCI’s Legal Department, told the conference. 

“They may have the greatest impact on real estate, motor vehicles, beverages, and banking, which in turn will have a heavy effect on the people.”

Extent of pressure

VAT, a broadly-based consumption tax assessed on the value added to goods and services arising through the process of production, distribution, and consumption, is imposed on end consumers, with enterprises acting only as a collecting agent. 

Hence, “the VAT increase will put no pressure on the competitiveness of local enterprises,” said Ms. Le Thi Mai Lien, Director of Public Finance Policy Division at the National Institute of Finance Strategies and Policies at MoF.

Under current regulations, she explained, export tax on goods is 0 per cent, so enterprises are basically refunded. Domestically, although products’ retail prices are affected by any VAT increase, the level of impact also needs to be examined as what the degree of dependence and sharing between people and businesses ends up being. 

Theoretically, Ms. Lien commented, a VAT increase will cause inflation, but the measure of any influence still needs consideration on the volume of consumed goods together with other macro factors, including inflation and money supply.

Mr. Dao Huy Giam, General Secretary of the Vietnam Private Sector Forum (VPSF), told VET that the draft, if adopted, would raise the price of goods and services by a certain level. 

“In my opinion, if such a measure is applied it will increase the price of goods in the market by around 1-1.5 per cent,” he said. 

“But it will not affect enterprises’ competitiveness because all businesses would be subject to the same VAT rate. Although raising the VAT affects individuals, it would be an effective policy for the government to restructure its revenue.” 

From another perspective, “this move will cut productivity and enterprises’ income under the supply and demand rule,” a representative from Vinamilk told VET. 

He also said that if the VAT rose from 10 to 12 per cent, the total amount of VAT a household would have to pay every month would increase by around $62 to $75, or 21 per cent. This would lead to a reduction in people’s spending, which would hit sales.

Mr. Nguyen Huu Quang, CFO of Bonia Vietnam, also expressed concern. “Our business is about high-end fashion products and our customers are end-users, so Bonia, as well as other enterprises, both local and foreign, especially those in sectors such as retail, real estate or services, would be put under major pressure if the draft law is passed,” he said. 

VAT is an indirect tax on domestic consumption applied nationwide, he said, rather than at different levels. It is a multi-stage tax collected at every stage of the production and distribution and passed on to the end customer.

The greatest concern seems to be its effects on the real estate sector. “A VAT hike would have an extraordinary impact on Vietnam’s real estate market because it will would push up housing prices by 5 to 7 per cent,” Mr. Nguyen Manh Ha, Vice Chairman of the Vietnam National Real Estate Association, told the VCCI conference. 

The amended VAT law would, if passed, charge a VAT rate based on housing prices without deducting land use fees and land rental income, which are paid by the landlord. This would make housing prices increase. 

Meanwhile, apartments in Hanoi currently have land use fees accounting for 20 per cent of their price (equivalent to $8,800 to more than $13,000), with the proportion being 50-70 per cent for townhouses.

In addition, the transfer of land use rights would incur a VAT rate of 12 per cent, casting a cloud over the market. “The real estate sector accounts for 10 per cent of all outstanding loans in the banking system, with collateralized loans accounting for about 70 per cent,” Mr. Ha said. 

“VAT increasing to 12 per cent may result in the real estate market freezing.” Other industry insiders have pointed out that housing prices, which currently need to come down, would rise dramatically if the draft is passed. 

“I recommend not amending the VAT law as it applies to the real estate sector before the government evaluates the side effects,” Mr. Ha added.

“Unsavory” drinks

Another controversy surrounding the draft law is that the MoF also proposes levying a SCT on a range of sweetened beverages. If approved, the proposal would see the tax imposed on carbonated and non-carbonated soft drinks, energy drinks, sports drinks, and bottled instant coffee and tea. 

The ministry has suggested either a 10 or a 20 per cent rate, applied from 2019, with 10 per cent being the preferred option. “The tax would help regulate the consumption of sweetened beverages, and it’s also an international norm,” according to the proposal.

The MoF cited a report from the World Health Organization (WHO) that shows excessive consumption of sugary drinks can lead to obesity. A study released in June found that about 25 per cent of Vietnamese adults are overweight or obese, and the obesity rate for children under five years old is also rising quickly. 

Many Southeast Asian countries have already imposed taxes on sugary drinks, according to MoF, of 20-25 per cent in Thailand, 5-10 per cent in Laos, and 10 per cent in Cambodia. In Vietnam, SCT is levied on items and services considered unhealthy or luxurious, such as tobacco, alcoholic drinks, and motor cars.

If the SCT proposal is passed, the price of beverages in Vietnam would increase by around 12 per cent, affecting consumption, according to Mr. Nguyen Van Viet, Chairman of the Vietnam Association for Beer-Alcohol and Beverages. At the same time, “the cost of production will rise as the VAT also applies to transportation,” he said. 

“All these factors will have consequences, including price rises and falling consumption and sales leading to lower production and fewer workers. Small and medium-sized enterprises would be the most affected.” 

A representative from Coca-Cola Vietnam, the largest beverage producer in the country, told VET in a statement that “Coca-Cola recognizes that all governments need to stabilize revenue and public budgets to finance infrastructure and provide necessary services. We do not oppose taxation, and the Coca-Cola system has consistently paid all taxes according to local laws.” 

However, “we oppose efforts that isolate non-alcoholic beverages for additional, discriminatory taxes. Such discriminatory taxes conflict with the best practice in international fiscal policy of broad-based taxes with low rates and few exceptions.”

The US-ASEAN Business Council has similar views on a SCT on sugary drinks, seeking clarification of some definitions that may cause a variety of interpretations, the application of the SCT only on high-content soft drinks, and the taxing of all foods containing sugar by 1-3 per cent. 

Regarding the SCT on sweetened beverages, Mr. Thomas McClelland, Chairman of the Tax and Transfer Pricing Sector Committee at Eurocham Vietnam, said “this is not an issue that affects European companies more than others, however there is an interesting question as to whether the VAT rate for sugar would be increased in the future to 12 per cent.”

Coping strategies

Whatever the next steps of the government may be, the business community has expressed much concern over these issues. Bonia Vietnam, Mr. Quang said, “will certainly take steps to review our costs. These measures are aimed at stabilizing sales prices and ensuring the revenue and profit targets of Bonia in particular and other businesses in general are met.”

One issue that may arise in the context of the government raising SCT and VAT rates, Mr. Quang emphasized, is “the issue of transfer pricing at foreign-invested enterprises (FIEs). 

FIEs will definitely have to think about transfer pricing to maximize profitability in the context of higher tax costs in Vietnam than in other countries. This will be a problem and a challenge for Vietnam’s tax authorities.”

The problem for enterprises is what solutions and responses are available to avoid being overly affected by a VAT increase. Some economists have said that enterprises should immediately re-evaluate their entire systems, cut unnecessary waste, and then apply appropriate and effective marketing policies as well as determine a roadmap for price support to customers to create some stability.

According to Mr. Quang, increases in retail prices should be conducted over the long term so customers who prefer their products can adjust. Prices will change gradually, he said, and with quality being a continual focus the same profit levels should be achieved. 

“Such solutions can help enterprises overcome the negative effects and respond better to any impacts from new tax policies,” he said.

VN Economic Times